There Are Reasons To Feel Uneasy About Warrior Met Coal's (NYSE:HCC) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Warrior Met Coal (NYSE:HCC) and its ROCE trend, we weren't exactly thrilled.

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)

0.19 = US$462m ÷ (US$2.6b - US$174m) (Based on the trailing twelve months to June 2024).

So, Warrior Met Coal has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 9.4% it's much better.

View our latest analysis for Warrior Met Coal

In the above chart we have measured Warrior Met Coal'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 Warrior Met Coal for free.

The Trend Of ROCE

When we looked at the ROCE trend at Warrior Met Coal, we didn't gain much confidence. To be more specific, ROCE has fallen from 46% over the last five years. However it looks like Warrior Met Coal might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Warrior Met Coal's ROCE

Bringing it all together, while we're somewhat encouraged by Warrior Met Coal's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 230% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 2 warning signs with Warrior Met Coal and understanding these should be part of your investment process.

While Warrior Met Coal may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.