Salesforce (NYSE:CRM) had a tough three months, falling 19%. However, the company’s fundamentals look pretty decent, and long-term financials are usually biased towards future market price movements. In this article, we have chosen to focus on it Salesforce ROE.
Return on Equity, or ROE, is a key metric used to assess how efficiently a company’s management is using the company’s capital. Put simply, it measures a company’s profitability in relation to its equity.
How do you calculate return on equity?
That Formula for ROE is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Salesforce is:
0.9% = $536M ÷ $60B (based on trailing 12 months to July 2022).
“Return” is the amount earned after tax over the past 12 months. One way to think of this is that for every $1 in shareholder equity, the company makes $0.01 in profit.
What is the relationship between ROE and earnings growth?
So far we’ve learned that ROE measures how efficiently a company generates its profits. Based on how much of its profits the company reinvests, or “retains,” we are then able to assess a company’s future ability to generate profits. Assuming all else remains the same, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Salesforce earnings growth and 0.9% ROE
As you can see, Salesforce’s ROE looks pretty weak. Even compared to the industry average of 13%, the ROE figure is pretty disappointing. However, we’re pleasantly surprised to see that Salesforce has grown its net income at a whopping 29% rate over the past five years. We assume that other factors could play a role here. Such as – a high accumulation of profits or efficient management.
As a next step, we compared Salesforce’s net income growth to that of the industry and found that the company has a similar growth number compared to the industry average growth rate of 25% over the same period.
Earnings growth is an important factor in stock valuation. The investor should try to determine whether expected growth or earnings decline, whichever is the case, is being priced in. This helps him determine if the stock’s future looks bright or ominous. Has the market priced in future prospects for CRM? You can find out in the our latest infographic research report on intrinsic value.
Is Salesforce using its profits efficiently?
Salesforce doesn’t currently pay a dividend, which essentially means it’s reinvested all of its profits into the company. This definitely contributes to the high earnings growth we discussed above.
Overall, we feel that Salesforce has some positive attributes. Despite the low yield, the company has delivered impressive earnings growth as it has heavily reinvested in its business. However, based on the latest analyst estimates, we note that the company’s earnings are likely to gain momentum. You can read more about the latest analyst forecasts for the company here Visualization of analyst forecasts for the company.
The assessment is complex, but we help to simplify it.
find out if Foreclosure may be over or under priced by reviewing our comprehensive analysis which includes the following Fair Value Estimates, Risks and Warnings, Dividends, Insider Trading and Financial Health.
Do you have any feedback about this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.