Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we’d want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Kinder Morgan (NYSE:KMI) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Kinder Morgan, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.052 = US$3.5b ÷ (US$72b – US$4.4b) (Based on the trailing twelve months to September 2020).
Therefore, Kinder Morgan has an ROCE of 5.2%. Ultimately, that’s a low return and it under-performs the Oil and Gas industry average of 7.9%.
Above you can see how the current ROCE for Kinder Morgan compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our freereport for Kinder Morgan.
How Are Returns Trending?
Things have been pretty stable at Kinder Morgan, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn’t reinvesting in itself, so it’s plausible that it’s past the growth phase. So unless we see a substantial change at Kinder Morgan in terms of ROCE and additional investments being made, we wouldn’t hold our breath on it being a multi-bagger. That probably explains why Kinder Morgan has been paying out 116% of its earnings as dividends to shareholders. Most shareholders probably know this and own the stock for its dividend.
The Bottom Line
In summary, Kinder Morgan isn’t compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 45% so the market doesn’t look too hopeful on these trends strengthening any time soon. On the whole, we aren’t too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
While Kinder Morgan may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this freelist here.
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.