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Should You Care About Brigham Minerals, Inc.’s (NYSE:MNRL) Investment Potential?

Today we'll look at Brigham Minerals, Inc. (NYSE:MNRL) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Brigham Minerals:

0.056 = US$44m ÷ (US$784m - US$12m) (Based on the trailing twelve months to December 2019.)

So, Brigham Minerals has an ROCE of 5.6%.

Check out our latest analysis for Brigham Minerals

Does Brigham Minerals Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Brigham Minerals's ROCE is fairly close to the Oil and Gas industry average of 6.8%. Setting aside the industry comparison for now, Brigham Minerals's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

The image below shows how Brigham Minerals's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:MNRL Past Revenue and Net Income April 20th 2020
NYSE:MNRL Past Revenue and Net Income April 20th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Brigham Minerals could be considered a cyclical business. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Brigham Minerals's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Brigham Minerals has total assets of US$784m and current liabilities of US$12m. As a result, its current liabilities are equal to approximately 1.5% of its total assets. With low levels of current liabilities, at least Brigham Minerals's mediocre ROCE is not unduly boosted.

The Bottom Line On Brigham Minerals's ROCE

If performance improves, then Brigham Minerals may be an OK investment, especially at the right valuation. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.