Progress Software (NASDAQ:PRGS) has had a rough month with its share price down 4.2%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Progress Software’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Progress Software is:
14% = US$47m ÷ US$340m (Based on the trailing twelve months to May 2020).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.14 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Progress Software’s Earnings Growth And 14% ROE
At first glance, Progress Software seems to have a decent ROE. On comparing with the average industry ROE of 11% the company’s ROE looks pretty remarkable. This probably laid the ground for Progress Software’s significant 36% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Progress Software’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 27%.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Is Progress Software fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Progress Software Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 53% (implying that it keeps only 47% of profits) for Progress Software suggests that the company’s growth wasn’t really hampered despite it returning most of the earnings to its shareholders.
Moreover, Progress Software is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend.
On the whole, we feel that Progress Software’s performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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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