U.S. markets open in 21 minutes
  • S&P Futures

    4,413.75
    -24.25 (-0.55%)
     
  • Dow Futures

    34,481.00
    -163.00 (-0.47%)
     
  • Nasdaq Futures

    15,189.00
    -114.50 (-0.75%)
     
  • Russell 2000 Futures

    2,239.60
    -15.60 (-0.69%)
     
  • Crude Oil

    73.11
    -0.19 (-0.26%)
     
  • Gold

    1,745.50
    -4.30 (-0.25%)
     
  • Silver

    22.43
    -0.25 (-1.10%)
     
  • EUR/USD

    1.1707
    -0.0040 (-0.34%)
     
  • 10-Yr Bond

    1.4250
    +0.0150 (+1.06%)
     
  • Vix

    20.36
    -0.51 (-2.44%)
     
  • GBP/USD

    1.3661
    -0.0060 (-0.44%)
     
  • USD/JPY

    110.5650
    +0.2640 (+0.24%)
     
  • BTC-USD

    41,174.23
    -2,311.86 (-5.32%)
     
  • CMC Crypto 200

    1,020.72
    -88.20 (-7.95%)
     
  • FTSE 100

    7,047.24
    -31.11 (-0.44%)
     
  • Nikkei 225

    30,248.81
    +609.41 (+2.06%)
     

CMS Energy (NYSE:CMS) Has More To Do To Multiply In Value Going Forward

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·2 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

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. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

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 CMS Energy is:

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

0.06 = US$1.6b ÷ (US$30b - US$2.9b) (Based on the trailing twelve months to March 2021).

Thus, CMS Energy has an ROCE of 6.0%. On its own that's a low return, but compared to the average of 4.8% generated by the Integrated Utilities industry, it's much better.

View our latest analysis for CMS Energy

roce
roce

Above you can see how the current ROCE for CMS Energy compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

In terms of CMS Energy's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 6.0% and the business has deployed 49% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Bottom Line

As we've seen above, CMS Energy's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 57% over the last five years. 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 1 warning sign with CMS Energy and understanding this should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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. 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.

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