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Don’t Buy CMS Energy Corporation (NYSE:CMS) Until You Understand Its ROCE

Simply Wall St

Today we are going to look at CMS Energy Corporation (NYSE:CMS) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 CMS Energy:

0.053 = US$1.2b ÷ (US$25b - US$2.4b) (Based on the trailing twelve months to June 2019.)

So, CMS Energy has an ROCE of 5.3%.

View our latest analysis for CMS Energy

Does CMS Energy Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, CMS Energy's ROCE appears to be around the 4.9% average of the Integrated Utilities industry. Putting aside CMS Energy's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

You can see in the image below how CMS Energy's ROCE compares to its industry. Click to see more on past growth.

NYSE:CMS Past Revenue and Net Income, September 25th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect CMS Energy's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

CMS Energy has total assets of US$25b and current liabilities of US$2.4b. Therefore its current liabilities are equivalent to approximately 9.4% of its total assets. CMS Energy has very few current liabilities, which have a minimal effect on its already low ROCE.

Our Take On CMS Energy's ROCE

Nonetheless, there may be better places to invest your capital. You might be able to find a better investment than CMS Energy. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like CMS Energy better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, 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.