What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. So when we looked at the ROCE trend of Matador Resources (NYSE:MTDR) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. Analysts use this formula to calculate it for Matador Resources:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.35 = US$1.8b ÷ (US$5.6b - US$576m) (Based on the trailing twelve months to December 2022).
Therefore, Matador Resources has an ROCE of 35%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 21%.
Above you can see how the current ROCE for Matador Resources 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.
The Trend Of ROCE
The trends we've noticed at Matador Resources are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 35%. Basically the business is earning more per dollar of capital invested and in addition to that, 167% more capital is being employed now too. So we're very much inspired by what we're seeing at Matador Resources thanks to its ability to profitably reinvest capital.
What We Can Learn From Matador Resources' ROCE
In summary, it's great to see that Matador Resources can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a solid 58% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if Matador Resources can keep these trends up, it could have a bright future ahead.
If you want to continue researching Matador Resources, you might be interested to know about the 1 warning sign that our analysis has discovered.
Matador Resources is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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Matador Resources Company, an independent energy company, engages in the exploration, development, production, and acquisition of oil and natural gas resources in the United States.
Very undervalued with acceptable track record.