New Zealand markets open in 3 hours 19 minutes
  • NZX 50

    11,316.46
    +49.07 (+0.44%)
     
  • NZD/USD

    0.6468
    +0.0058 (+0.91%)
     
  • ALL ORDS

    7,398.90
    +7.90 (+0.11%)
     
  • OIL

    110.30
    +0.02 (+0.02%)
     
  • GOLD

    1,854.30
    +12.20 (+0.66%)
     

CMS Energy (NYSE:CMS) Hasn't Managed To Accelerate Its Returns

·2-min read

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think CMS Energy (NYSE:CMS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for CMS Energy, this is the formula:

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

0.056 = US$1.5b ÷ (US$31b - US$3.3b) (Based on the trailing twelve months to September 2021).

Therefore, CMS Energy has an ROCE of 5.6%. On its own, that's a low figure but it's around the 4.8% average generated by the Integrated Utilities industry.

Check out our latest analysis for CMS Energy

roce
roce

In the above chart we have measured CMS Energy'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 CMS Energy here for free.

How Are Returns Trending?

There are better returns on capital out there than what we're seeing at CMS Energy. Over the past five years, ROCE has remained relatively flat at around 5.6% and the business has deployed 45% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

Long story short, while CMS Energy has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 75% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we found 2 warning signs for CMS Energy (1 shouldn't be ignored) you should be aware of.

While CMS Energy isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting