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The Returns At Cass Information Systems (NASDAQ:CASS) Provide Us With Signs Of What's To Come

Simply Wall St
·3 mins read

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Cass Information Systems (NASDAQ:CASS), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Cass Information Systems is:

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

0.048 = US$38m ÷ (US$1.8b - US$1.0b) (Based on the trailing twelve months to June 2020).

So, Cass Information Systems has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 10.0%.

See our latest analysis for Cass Information Systems

roce
roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cass Information Systems' ROCE against it's prior returns. If you're interested in investigating Cass Information Systems' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Cass Information Systems Tell Us?

The returns on capital haven't changed much for Cass Information Systems in recent years. The company has consistently earned 4.8% for the last five years, and the capital employed within the business has risen 28% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Cass Information Systems' current liabilities are still rather high at 56% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

As we've seen above, Cass Information Systems' returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 7.0% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Cass Information Systems could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Cass Information Systems 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 free list 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.

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