Returns On Capital Are A Standout For Alpha Metallurgical Resources (NYSE:AMR)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Alpha Metallurgical Resources' (NYSE:AMR) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Alpha Metallurgical Resources, this is the formula:

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

0.41 = US$856m ÷ (US$2.4b - US$310m) (Based on the trailing twelve months to December 2023).

So, Alpha Metallurgical Resources has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 9.4% earned by companies in a similar industry.

Check out our latest analysis for Alpha Metallurgical Resources

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're interested, you can view the analysts predictions in our free analyst report for Alpha Metallurgical Resources .

The Trend Of ROCE

Alpha Metallurgical Resources has not disappointed with their ROCE growth. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 294% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

The Key Takeaway

To bring it all together, Alpha Metallurgical Resources has done well to increase the returns it's generating from its capital employed. Since the stock has returned a staggering 558% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Alpha Metallurgical Resources does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.