What Do The Returns On Capital At Computer Programs and Systems (NASDAQ:CPSI) Tell Us?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Computer Programs and Systems (NASDAQ:CPSI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. Analysts use this formula to calculate it for Computer Programs and Systems:

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

0.073 = US$21m ÷ (US$326m - US$37m) (Based on the trailing twelve months to December 2020).

Thus, Computer Programs and Systems has an ROCE of 7.3%. On its own that's a low return, but compared to the average of 5.4% generated by the Healthcare Services industry, it's much better.

Check out our latest analysis for Computer Programs and Systems

Above you can see how the current ROCE for Computer Programs and Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

In terms of Computer Programs and Systems' historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 35% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Computer Programs and Systems' ROCE

To conclude, we've found that Computer Programs and Systems is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 40% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Computer Programs and Systems has the makings of a multi-bagger.

On a separate note, we've found 1 warning sign for Computer Programs and Systems you'll probably want to know about.

While Computer Programs and Systems 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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