Is Computer Programs and Systems, Inc.'s (NASDAQ:CPSI) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Computer Programs and Systems' (NASDAQ:CPSI) stock is up by a considerable 19% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Computer Programs and Systems' ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Computer Programs and Systems

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Computer Programs and Systems is:

7.1% = US$14m ÷ US$200m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Computer Programs and Systems' Earnings Growth And 7.1% ROE

On the face of it, Computer Programs and Systems' ROE is not much to talk about. However, its ROE is similar to the industry average of 6.6%, so we won't completely dismiss the company. Looking at Computer Programs and Systems' exceptional 22% five-year net income growth in particular, we are definitely impressed. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between Computer Programs and Systems' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 22% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is CPSI worth today? The intrinsic value infographic in our free research report helps visualize whether CPSI is currently mispriced by the market.

Is Computer Programs and Systems Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.

Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 46% over the next three years.

Conclusion

In total, it does look like Computer Programs and Systems has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.
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