If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at the ROCE trend of Magnolia Oil & Gas (NYSE:MGY) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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$532m ÷ (US$2.8b - US$350m) (Based on the trailing twelve months to March 2024).

Thus, Magnolia Oil & Gas has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 12%.

Above you can see how the current ROCE for Magnolia Oil & Gas compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Magnolia Oil & Gas .

So How Is Magnolia Oil & Gas' ROCE Trending?

You'd find it hard not to be impressed with the ROCE trend at Magnolia Oil & Gas. The data shows that returns on capital have increased by 151% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 24% less than it was five years ago, which can be indicative of a business that's improving its efficiency. Magnolia Oil & Gas may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On Magnolia Oil & Gas' ROCE

In the end, Magnolia Oil & Gas has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the stock has returned a staggering 142% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you'd like to know about the risks facing Magnolia Oil & Gas, we've discovered 2 warning signs that you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com