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Northern Oil and Gas, Inc. (NYSEMKT:NOG) Is Employing Capital Very Effectively

Simply Wall St

Today we are going to look at Northern Oil and Gas, Inc. (NYSEMKT:NOG) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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'.

How Do You Calculate Return On Capital Employed?

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 Northern Oil and Gas:

0.28 = US$469m ÷ (US$1.9b - US$231m) (Based on the trailing twelve months to September 2019.)

So, Northern Oil and Gas has an ROCE of 28%.

See our latest analysis for Northern Oil and Gas

Is Northern Oil and Gas's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Northern Oil and Gas's ROCE is meaningfully better than the 8.7% average in the Oil and Gas industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Northern Oil and Gas's ROCE currently appears to be excellent.

Our data shows that Northern Oil and Gas currently has an ROCE of 28%, compared to its ROCE of 18% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Northern Oil and Gas's past growth compares to other companies.

AMEX:NOG Past Revenue and Net Income, February 17th 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Northern Oil and Gas could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Northern Oil and Gas.

How Northern Oil and Gas's Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Northern Oil and Gas has current liabilities of US$231m and total assets of US$1.9b. Therefore its current liabilities are equivalent to approximately 12% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.

The Bottom Line On Northern Oil and Gas's ROCE

Low current liabilities and high ROCE is a good combination, making Northern Oil and Gas look quite interesting. Northern Oil and Gas shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

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.