What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at Viper Energy (NASDAQ:VNOM) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Viper Energy:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = US$576m ÷ (US$4.2b - US$44m) (Based on the trailing twelve months to September 2024).
Thus, Viper Energy has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 12% generated by the Oil and Gas industry.
In the above chart we have measured Viper Energy's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Viper Energy .
What Does the ROCE Trend For Viper Energy Tell Us?
Viper Energy is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. The amount of capital employed has increased too, by 108%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
In summary, it's great to see that Viper Energy 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 64% to shareholders over the last year, 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 Viper Energy can keep these trends up, it could have a bright future ahead.
On a final note, we've found 2 warning signs for Viper Energy that we think you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
