Brigham Minerals (NYSE:MNRL) Will Will Want To Turn Around Its Return Trends

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Brigham Minerals (NYSE:MNRL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Brigham Minerals:

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

0.014 = US$9.3m ÷ (US$681m - US$7.9m) (Based on the trailing twelve months to December 2020).

Therefore, Brigham Minerals has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 7.9%.

See our latest analysis for Brigham Minerals

Above you can see how the current ROCE for Brigham Minerals compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Brigham Minerals' ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 8.1% three years ago, while capital employed has grown 104%. That being said, Brigham Minerals raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Brigham Minerals probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

To conclude, we've found that Brigham Minerals is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 70% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 2 warning signs we've spotted with Brigham Minerals (including 1 which can't be ignored) .

While Brigham Minerals may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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