When VMware Inc (NYSE:VMW) released its most recent earnings update (04 May 2018), I compared it against two factor: its historical earnings track record, and the performance of its industry peers on average. Understanding how VMware performed requires a benchmark rather than trying to assess a standalone number at one point in time. Below is a quick commentary on how I see VMW has performed.
Were VMW’s earnings stronger than its past performances and the industry?VMW’s trailing twelve-month earnings (from 04 May 2018) of US$1.27b has more than doubled from -US$96.00m in the prior year. Furthermore, this one-year growth rate has exceeded its 5-year annual growth average of 2.90%, indicating the rate at which VMW is growing has accelerated. What’s the driver of this growth? Well, let’s take a look at whether it is merely a result of industry tailwinds, or if VMware has experienced some company-specific growth.
The ascend in earnings seems to be bolstered by a strong top-line increase outpacing its growth rate of expenses. Though this has caused a margin contraction, it has made VMware more profitable. Looking at growth from a sector-level, the US software industry has been growing its average earnings by double-digit 11.20% over the previous year, and 12.08% over the past half a decade. This growth is a median of profitable companies of 25 Software companies in US including NetSol Technologies, LINE and LINE. This means that any uplift the industry is benefiting from, VMware is capable of leveraging this to its advantage.In terms of returns from investment, VMware has not invested its equity funds well, leading to a 13.12% return on equity (ROE), below the sensible minimum of 20%. Furthermore, its return on assets (ROA) of 5.54% is below the US Software industry of 7.51%, indicating VMware’s are utilized less efficiently. And finally, its return on capital (ROC), which also accounts for VMware’s debt level, has declined over the past 3 years from 11.25% to 10.85%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 7.49% to 43.85% over the past 5 years.
What does this mean?
VMware’s track record can be a valuable insight into its earnings performance, but it certainly doesn’t tell the whole story. While VMware has a good historical track record with positive growth and profitability, there’s no certainty that this will extrapolate into the future. I recommend you continue to research VMware to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VMW’s future growth? Take a look at our free research report of analyst consensus for VMW’s outlook.
- Financial Health: Are VMW’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 04 May 2018. This may not be consistent with full year annual report figures.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.