Yahoo Finance Some Investors May Be Worried About Warrior Met Coal's (NYSE:HCC) Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Warrior Met Coal (NYSE:HCC), it does have a high ROCE right now, but lets see how returns are trending.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Warrior Met Coal is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = US$485m ÷ (US$2.5b - US$163m) (Based on the trailing twelve months to March 2024).
So, Warrior Met Coal has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Metals and Mining industry average of 8.9%.
View our latest analysis for Warrior Met Coal
Above you can see how the current ROCE for Warrior Met Coal 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 analyst report for Warrior Met Coal .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Warrior Met Coal, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 38% where it was five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
In Conclusion...
In summary, we're somewhat concerned by Warrior Met Coal's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 159% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
Like most companies, Warrior Met Coal does come with some risks, and we've found 2 warning signs that you should be aware of.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high 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.
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