Today we’ll look at CSG Systems International, Inc. (NASDAQ:CSGS) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 CSG Systems International:
0.15 = US$129m ÷ (US$1.2b – US$336m) (Based on the trailing twelve months to June 2019.)
So, CSG Systems International has an ROCE of 15%.
Does CSG Systems International Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that CSG Systems International’s ROCE is meaningfully better than the 10% average in the IT industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from CSG Systems International’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
CSG Systems International’s current ROCE of 15% is lower than its ROCE in the past, which was 23%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how CSG Systems International’s ROCE compares to its industry.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for CSG Systems International.
CSG Systems International’s Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
CSG Systems International has total liabilities of US$336m and total assets of US$1.2b. Therefore its current liabilities are equivalent to approximately 28% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On CSG Systems International’s ROCE
With that in mind, CSG Systems International’s ROCE appears pretty good. CSG Systems International looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.