Why We Like The Returns At Magnolia Oil & Gas (NYSE:MGY)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at the ROCE trend of Magnolia Oil & Gas (NYSE:MGY) we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Magnolia Oil & Gas, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.22 = US$545m ÷ (US$2.8b - US$355m) (Based on the trailing twelve months to June 2024).

Therefore, Magnolia Oil & Gas has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 12% earned by companies in a similar industry.

See our latest analysis for Magnolia Oil & Gas

In the above chart we have measured Magnolia Oil & Gas' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Magnolia Oil & Gas for free.

How Are Returns Trending?

You'd find it hard not to be impressed with the ROCE trend at Magnolia Oil & Gas. We found that the returns on capital employed over the last five years have risen by 206%. The company is now earning US$0.2 per dollar of capital employed. In regards to capital employed, Magnolia Oil & Gas appears to been achieving more with less, since the business is using 25% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

What We Can Learn From Magnolia Oil & Gas' ROCE

From what we've seen above, Magnolia Oil & Gas has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 167% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a final note, we've found 2 warning signs for Magnolia Oil & Gas that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.