If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Alpha Metallurgical Resources (NYSE:AMR) we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)
0.42 = US$863m ÷ (US$2.4b - US$315m) (Based on the trailing twelve months to September 2023).
Therefore, Alpha Metallurgical Resources has an ROCE of 42%. That's a fantastic return and not only that, it outpaces the average of 9.9% earned by companies in a similar industry.
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
Investors would be pleased with what's happening at Alpha Metallurgical Resources. The data shows that returns on capital have increased substantially over the last five years to 42%. The amount of capital employed has increased too, by 179%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line On Alpha Metallurgical Resources' ROCE
To sum it up, Alpha Metallurgical Resources has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 523% 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.
One final note, you should learn about the 2 warning signs we've spotted with Alpha Metallurgical Resources (including 1 which is a bit unpleasant) .
Alpha Metallurgical Resources is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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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.