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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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)?

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 Magnolia Oil & Gas:

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).

So, 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%.

Check out 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 to see what analysts are forecasting going forward, you should check out our free analyst report for Magnolia Oil & Gas .

The Trend Of ROCE

Magnolia Oil & Gas has not disappointed in regards to ROCE growth. The figures show that over the last five years, returns on capital have grown 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. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

What We Can Learn From Magnolia Oil & Gas' ROCE

In a nutshell, we're pleased to see that Magnolia Oil & Gas has been able to generate higher returns from less capital. Since the stock has returned a staggering 110% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 2 warning signs facing Magnolia Oil & Gas that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.