Salesforce (NYSE:CRM) has had a rough three months with its share price down 15%. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Salesforce’s ROE today.
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. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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 Salesforce is:
0.9% = US$536m ÷ US$60b (Based on the trailing twelve months to July 2022).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.01.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
Salesforce’s Earnings Growth And 0.9% ROE
It is hard to argue that Salesforce’s ROE is much good in and of itself. Even when compared to the industry average of 13%, the ROE figure is pretty disappointing. However, we we’re pleasantly surprised to see that Salesforce grew its net income at a significant rate of 29% in the last five years. Therefore, there could be other reasons behind this growth. Such as – high earnings retention or an efficient management in place.
We then performed a comparison between Salesforce’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 26% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Salesforce fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Salesforce Using Its Retained Earnings Effectively?
Salesforce doesn’t pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what’s driving the high earnings growth number discussed above.
On the whole, we do feel that Salesforce has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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