Alpha Metallurgical Resources (NYSE:AMR) Is Looking To Continue Growing Its Returns On Capital

By
Simply Wall St
Published
November 08, 2021
NYSE:AMR
Source: Shutterstock

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. Speaking of which, we noticed some great changes in Alpha Metallurgical Resources' (NYSE:AMR) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Alpha Metallurgical Resources:

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

0.10 = US$144m ÷ (US$1.7b - US$292m) (Based on the trailing twelve months to September 2021).

Thus, Alpha Metallurgical Resources has an ROCE of 10%. In isolation, that's a pretty standard return but against the Metals and Mining industry average of 17%, it's not as good.

See our latest analysis for Alpha Metallurgical Resources

roce
NYSE:AMR Return on Capital Employed November 9th 2021

In the above chart we have measured Alpha Metallurgical Resources' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Alpha Metallurgical Resources.

So How Is Alpha Metallurgical Resources' ROCE Trending?

We're delighted to see that Alpha Metallurgical Resources is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 10% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Alpha Metallurgical Resources is utilizing 49% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

The Bottom Line On Alpha Metallurgical Resources' ROCE

Overall, Alpha Metallurgical Resources gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 13% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

On a separate note, we've found 1 warning sign for Alpha Metallurgical Resources you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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