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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Rattler Midstream's (NASDAQ:RTLR) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Rattler Midstream:

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

0.094 = US$177m ÷ (US$1.9b - US$49m) (Based on the trailing twelve months to December 2021).

Therefore, Rattler Midstream has an ROCE of 9.4%. On its own, that's a low figure but it's around the 9.9% average generated by the Oil and Gas industry.

See our latest analysis for Rattler Midstream

Above you can see how the current ROCE for Rattler Midstream compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Rattler Midstream.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The data shows that returns on capital have increased substantially over the last five years to 9.4%. The amount of capital employed has increased too, by 1,847%. So we're very much inspired by what we're seeing at Rattler Midstream thanks to its ability to profitably reinvest capital.

What We Can Learn From Rattler Midstream's ROCE

All in all, it's terrific to see that Rattler Midstream is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 46% 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.

Rattler Midstream does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.