Returns On Capital At Cass Information Systems (NASDAQ:CASS) Paint An Interesting Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Cass Information Systems (NASDAQ:CASS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Cass Information Systems:

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

0.04 = US$34m ÷ (US$2.0b - US$1.1b) (Based on the trailing twelve months to September 2020).

Therefore, Cass Information Systems has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the IT industry average of 9.6%.

See our latest analysis for Cass Information Systems

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Cass Information Systems' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Cass Information Systems, we didn't gain much confidence. To be more specific, ROCE has fallen from 5.2% over the last five years. However it looks like Cass Information Systems might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Cass Information Systems' current liabilities are still rather high at 57% 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.

Our Take On Cass Information Systems' ROCE

Bringing it all together, while we're somewhat encouraged by Cass Information Systems' reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 8.9% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. 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.

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