CSG Systems International, Inc.’s (NASDAQ:CSGS) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at CSG Systems International’s (NASDAQ:CSGS) recent performance, when its stock has declined 3.5% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on CSG Systems International’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for CSG Systems International is:

13% = US$57m ÷ US$428m (Based on the trailing twelve months to March 2021).

The ‘return’ is the yearly profit. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.13 in profit.

What Has ROE Got To Do With 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.

CSG Systems International’s Earnings Growth And 13% ROE

At first glance, CSG Systems International seems to have a decent ROE. Even so, when compared with the average industry ROE of 17%, we aren’t very excited. Additionally, the flat earnings seen by CSG Systems International over the past five years doesn’t paint a very bright picture. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. Hence there might be some other aspects that are causing the flat growth in earnings. These include low earnings retention or poor capital allocation.

As a next step, we compared CSG Systems International’s net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 14% in the same period.

NasdaqGS:CSGS Past Earnings Growth August 1st 2021

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. If you’re wondering about CSG Systems International’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CSG Systems International Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 41% (implying that the company keeps 59% of its income) over the last three years, CSG Systems International has seen a negligible amount of growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company’s business may be deteriorating.

Additionally, CSG Systems International has paid dividends over a period of eight years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, it does look like CSG Systems International has some positive aspects to its business. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that’s hampering growth. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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