Return Trends At Kinder Morgan (NYSE:KMI) Aren't Appealing

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Kinder Morgan (NYSE:KMI) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Kinder Morgan is:

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

0.064 = US$4.2b ÷ (US$71b - US$4.6b) (Based on the trailing twelve months to March 2024).

Therefore, Kinder Morgan has an ROCE of 6.4%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 12%.

View our latest analysis for Kinder Morgan

In the above chart we have measured Kinder Morgan'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 Kinder Morgan for free.

The Trend Of ROCE

Over the past five years, Kinder Morgan's ROCE and capital employed have both remained mostly flat. 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 88% of its earnings as 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.

In Conclusion...

In a nutshell, Kinder Morgan has been trudging along with the same returns from the same amount of capital over the last five years. And with the stock having returned a mere 29% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing: We've identified 3 warning signs with Kinder Morgan (at least 2 which are concerning) , and understanding these would certainly be useful.

While Kinder Morgan 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.

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