Yahoo Finance CMS Energy (NYSE:CMS) Will Be Hoping To Turn Its Returns On Capital Around
What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at CMS Energy (NYSE:CMS) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. The formula for this calculation on CMS Energy is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = US$1.4b ÷ (US$30b - US$2.5b) (Based on the trailing twelve months to September 2022).
Thus, CMS Energy has an ROCE of 4.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.7%.
View our latest analysis for CMS Energy
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?
In terms of CMS Energy's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.3%, but since then they've fallen to 4.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On CMS Energy's ROCE
While returns have fallen for CMS Energy in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 30% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
CMS Energy does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...
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.
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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.
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