Should You Expect CONSOL Energy Inc (NYSE:CEIX) To Continue Delivering An ROE Of 26.17%?

I am writing today to help inform people who are new to the stock market and want to better understand how you can grow your money by investing in CONSOL Energy Inc (NYSE:CEIX).

With an ROE of 26.17%, CONSOL Energy Inc (NYSE:CEIX) outpaced its own industry which delivered a less exciting 11.36% over the past year. However, whether this above-industry ROE is actually impressive depends on if it can be maintained. A measure of sustainable returns is CEIX’s financial leverage. If CEIX borrows debt to invest in its business, its profits will be higher. But ROE does not capture any debt, so we only see high profits and low equity, which is great on the surface. But today let’s take a deeper dive below this surface. View out our latest analysis for CONSOL Energy

Breaking down ROE — the mother of all ratios

Return on Equity (ROE) weighs CONSOL Energy’s profit against the level of its shareholders’ equity. An ROE of 26.17% implies $0.26 returned on every $1 invested, so the higher the return, the better. If investors diversify their portfolio by industry, they may want to maximise their return in the Coal and Consumable Fuels sector by investing in the highest returning stock. However, this can be misleading as each firm has different costs of equity and debt levels i.e. the more debt CONSOL Energy has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden.

ROE is measured against cost of equity in order to determine the efficiency of CONSOL Energy’s equity capital deployed. Its cost of equity is 12.10%. Since CONSOL Energy’s return covers its cost in excess of 14.07%, its use of equity capital is efficient and likely to be sustainable. Simply put, CONSOL Energy pays less for its capital than what it generates in return. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover shows how much revenue CONSOL Energy can generate with its current asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. We can assess whether CONSOL Energy is fuelling ROE by excessively raising debt. Ideally, CONSOL Energy should have a balanced capital structure, which we can check by looking at the historic debt-to-equity ratio of the company. Currently the ratio stands at 218.13%, which is relatively high. This means CONSOL Energy’s above-average ROE may be driven by its high leverage and its ability to grow profit hinges on a large debt burden.

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. CONSOL Energy’s ROE is impressive relative to the industry average and also covers its cost of equity. Its high debt level means its strong ROE may be driven by debt funding which raises concerns over the sustainability of CONSOL Energy’s returns. Although ROE can be a useful metric, it is only a small part of diligent research.

For CONSOL Energy, I've put together three pertinent aspects you should look at:

1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is CONSOL Energy worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CONSOL Energy is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of CONSOL Energy? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.