To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Viper Energy's (NASDAQ:VNOM) returns on capital, so let's have a look.

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. The formula for this calculation on Viper Energy is:

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).

So, Viper Energy has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 12%.

See our latest analysis for Viper Energy

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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Viper Energy .

What Does the ROCE Trend For Viper Energy Tell Us?

Investors would be pleased with what's happening at Viper Energy. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 108% more capital is being employed now too. So we're very much inspired by what we're seeing at Viper Energy thanks to its ability to profitably reinvest capital.

The Bottom Line On Viper Energy's ROCE

To sum it up, Viper Energy has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 79% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Viper Energy does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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.