Should Weakness in SS&C Technologies Holdings, Inc.'s (NASDAQ:SSNC) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 3.5% over the past three months, it is easy to disregard SS&C Technologies Holdings (NASDAQ:SSNC). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to SS&C Technologies Holdings' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for SS&C Technologies Holdings is:

12% = US$817m ÷ US$6.9b (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.12 in profit.

See our latest analysis for SS&C Technologies Holdings

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

SS&C Technologies Holdings' Earnings Growth And 12% ROE

To begin with, SS&C Technologies Holdings seems to have a respectable ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 20%. On further research, we found that SS&C Technologies Holdings' net income growth of 3.9% over the past five years is quite low. Not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So there might be other reasons for the earnings growth to be low. These include low earnings retention or poor capital allocation.

Next, on comparing with the industry net income growth, we found that SS&C Technologies Holdings' reported growth was lower than the industry growth of 11% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if SS&C Technologies Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is SS&C Technologies Holdings Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 32% (or a retention ratio of 68% over the past three years, SS&C Technologies Holdings has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, SS&C Technologies Holdings has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 15% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 17%, over the same period.

Conclusion

Overall, we feel that SS&C Technologies Holdings certainly does have some positive factors to consider. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.