Investors Should Be Encouraged By Coal India's (NSE:COALINDIA) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at the ROCE trend of Coal India (NSE:COALINDIA) we really liked what we saw.

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. Analysts use this formula to calculate it for Coal India:

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

0.20 = ₹311b ÷ (₹2.2t - ₹603b) (Based on the trailing twelve months to September 2023).

Therefore, Coal India has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 16%.

View our latest analysis for Coal India

In the above chart we have measured Coal India'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 Coal India here for free.

What Does the ROCE Trend For Coal India Tell Us?

Investors would be pleased with what's happening at Coal India. Over the last five years, returns on capital employed have risen substantially to 20%. Basically the business is earning more per dollar of capital invested and in addition to that, 89% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Coal India's ROCE

To sum it up, Coal India has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 137% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Coal India can keep these trends up, it could have a bright future ahead.

Coal India does have some risks, we noticed 3 warning signs (and 2 which can't be ignored) we think you should know about.

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.