Today we are going to look at Computer Programs and Systems, Inc. (NASDAQ:CPSI) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Computer Programs and Systems:
0.086 = US$25m ÷ (US$328m - US$39m) (Based on the trailing twelve months to December 2018.)
Therefore, Computer Programs and Systems has an ROCE of 8.6%.
Does Computer Programs and Systems Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that Computer Programs and Systems's ROCE is fairly close to the Healthcare Services industry average of 7.7%. Setting aside the industry comparison for now, Computer Programs and Systems's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Computer Programs and Systems's current ROCE of 8.6% is lower than its ROCE in the past, which was 36%, 3 years ago. So investors might consider if it has had issues recently.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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.
Do Computer Programs and Systems's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Computer Programs and Systems has total assets of US$328m and current liabilities of US$39m. Therefore its current liabilities are equivalent to approximately 12% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
The Bottom Line On Computer Programs and Systems's ROCE
With that in mind, we're not overly impressed with Computer Programs and Systems's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Computer Programs and Systems. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Computer Programs and Systems better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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If you spot an error that warrants correction, please contact the editor at email@example.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.