To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Kinder Morgan (NYSE:KMI), we don’t think it’s current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its 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)
0.065 = US$4.2b ÷ (US$71b – US$6.0b) (Based on the trailing twelve months to June 2024).
Thus, Kinder Morgan has an ROCE of 6.5%. In absolute terms, that’s a low return and it also under-performs the Oil and Gas industry average of 12%.
View our latest analysis for Kinder Morgan
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 free analyst report for Kinder Morgan .
So How Is Kinder Morgan’s ROCE Trending?
There hasn’t been much to report for Kinder Morgan’s returns and its level of capital employed because both metrics have been steady for the past 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. On top of that you’ll notice that Kinder Morgan has been paying out a large portion (85%) of earnings in the form of dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.
The Key Takeaway
In summary, Kinder Morgan isn’t compounding its earnings but is generating stable returns on the same amount of capital employed. Although the market must be expecting these trends to improve because the stock has gained 44% 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.
If you’d like to know more about Kinder Morgan, we’ve spotted 3 warning signs, and 2 of them shouldn’t be ignored.
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.
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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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