The Returns On Capital At Brigham Minerals (NYSE:MNRL) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Brigham Minerals (NYSE:MNRL), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Brigham Minerals, this is the formula:

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

0.021 = US$14m ÷ (US$692m - US$7.0m) (Based on the trailing twelve months to March 2021).

Thus, Brigham Minerals has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 6.7%.

View our latest analysis for Brigham Minerals

In the above chart we have measured Brigham Minerals' 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 Brigham Minerals here for free.

What Does the ROCE Trend For Brigham Minerals Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 7.8% three years ago, while capital employed has grown 79%. Usually this isn't ideal, but given Brigham Minerals conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Brigham Minerals' earnings and if they change as a result from the capital raise.

The Bottom Line On Brigham Minerals' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Brigham Minerals have fallen, meanwhile the business is employing more capital than it was three years ago. However the stock has delivered a 99% return to shareholders over the last year, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Brigham Minerals (including 1 which can't be ignored) .

While Brigham Minerals isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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