Yahoo Finance Warrior Met Coal, Inc. (NYSE:HCC) Earns Among The Best Returns In Its Industry
Today we are going to look at Warrior Met Coal, Inc. (NYSE:HCC) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Warrior Met Coal:
0.45 = US$529m ÷ (US$1.3b - US$121m) (Based on the trailing twelve months to June 2019.)
So, Warrior Met Coal has an ROCE of 45%.
See our latest analysis for Warrior Met Coal
Is Warrior Met Coal's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Warrior Met Coal's ROCE is meaningfully better than the 8.9% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Warrior Met Coal's ROCE currently appears to be excellent.
Warrior Met Coal has an ROCE of 45%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability. You can see in the image below how Warrior Met Coal's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Warrior Met Coal could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Warrior Met Coal.
What Are Current Liabilities, And How Do They Affect Warrior Met Coal's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Warrior Met Coal has total liabilities of US$121m and total assets of US$1.3b. Therefore its current liabilities are equivalent to approximately 9.4% of its total assets. Warrior Met Coal has low current liabilities, which have a negligible impact on its relatively good ROCE.
What We Can Learn From Warrior Met Coal's ROCE
This is an attractive combination and suggests the company could have potential. Warrior Met Coal looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
Warrior Met Coal is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
