Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. With that in mind, we've noticed some promising trends at Rattler Midstream (NASDAQ:RTLR) so let's look a bit deeper.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Rattler Midstream, this is the formula:

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

0.095 = US$165m ÷ (US$1.8b - US$41m) (Based on the trailing twelve months to March 2021).

Thus, Rattler Midstream has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Oil and Gas industry average of 6.8%.

Check out our latest analysis for Rattler Midstream

In the above chart we have measured Rattler Midstream's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Rattler Midstream here for free.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 9.5%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 1,084%. So we're very much inspired by what we're seeing at Rattler Midstream thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Rattler Midstream 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 27% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Rattler Midstream does have some risks though, and we've spotted 2 warning signs for Rattler Midstream that you might be interested in.