If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Speaking of which, we noticed some great changes in Atlas Energy Solutions' (NYSE:AESI) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Atlas Energy Solutions:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = US$270m ÷ (US$1.3b - US$93m) (Based on the trailing twelve months to December 2023).
So, Atlas Energy Solutions has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Energy Services industry average of 12%.
In the above chart we have measured Atlas Energy Solutions' 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 Atlas Energy Solutions .
What Does the ROCE Trend For Atlas Energy Solutions Tell Us?
Atlas Energy Solutions is displaying some positive trends. The data shows that returns on capital have increased substantially over the last three years to 23%. The amount of capital employed has increased too, by 146%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line On Atlas Energy Solutions' ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Atlas Energy Solutions has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 32% return over the last year. Therefore, we think it would be worth your time to check if these trends are going to continue.
One final note, you should learn about the 5 warning signs we've spotted with Atlas Energy Solutions (including 1 which is a bit concerning) .
If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.