Returns On Capital At CSG Systems International (NASDAQ:CSGS) Have Stalled
If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over CSG Systems International's (NASDAQ:CSGS) trend of ROCE, we liked what we saw.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for CSG Systems International:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = US$121m ÷ (US$1.3b - US$445m) (Based on the trailing twelve months to September 2022).
Thus, CSG Systems International has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the IT industry average of 12% it's much better.
See our latest analysis for CSG Systems International
Above you can see how the current ROCE for CSG Systems International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering CSG Systems International here for free.
The Trend Of ROCE
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 22% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that CSG Systems International has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 35% of total assets, this reported ROCE would probably be less than15% because total capital employed would be higher.The 15% ROCE could be even lower if current liabilities weren't 35% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.
The Key Takeaway
To sum it up, CSG Systems International has simply been reinvesting capital steadily, at those decent rates of return. And the stock has followed suit returning a meaningful 46% to shareholders over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
One final note, you should learn about the 4 warning signs we've spotted with CSG Systems International (including 1 which shouldn't be ignored) .
While CSG Systems International 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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