A Snapshot of Science Applications International Corporation’s (NYSE:SAIC) ROE

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Many investors are still learning the different metrics that can be helpful when analyzing a stock. This article is for those who want to know more about return on equity (ROE). We’ll use ROE to look at Science Applications International Corporation (NYSE:SAIC), as a real-life example.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Science Applications International

How do you calculate return on equity?

the return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Science Applications International is:

18% = $285 million ÷ $1.6 billion (based on trailing 12 months to July 2021).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.18.

Does Science Applications International have a good ROE?

By comparing a company’s ROE with the average for its industry, we can get a quick measure of its quality. However, this method is only useful as a rough check, as companies differ quite a bit within the same industry classification. You can see in the graph below that Science Applications International has an ROE quite close to the professional services industry average (15%).

NYSE: SAIC Return on Equity November 17, 2021

So, although the ROE is not exceptional, it is at least acceptable. Although the ROE is similar to the industry, we still need to do further checks to see if the company’s ROE is being boosted by high debt levels. If true, this is more an indication of risk than potential. You can see the 2 risks we have identified for Science Applications International by visiting our risk dashboard for free on our platform here.

Why You Should Consider Debt When Looking at ROE

Virtually all businesses need money to invest in the business, to increase their profits. This money can come from issuing shares, retained earnings or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt necessary for growth will boost returns, but will not impact shareholders’ equity. So using debt can improve ROE, but with the added risk of stormy weather, metaphorically speaking.

Science Applications International’s debt and its ROE of 18%

Of note is Science Applications International’s heavy use of debt, leading to its debt-to-equity ratio of 1.64. There’s no doubt that its ROE is decent, but the company’s sky-high debt isn’t too exciting to see. Investors need to think carefully about how a company would perform if it weren’t able to borrow so easily, as credit markets change over time.

Summary

Return on equity is a way to compare the business quality of different companies. Companies that can earn high returns on equity without too much debt are generally of good quality. All things being equal, a higher ROE is better.

But when a company is of high quality, the market often gives it a price that reflects that. It is important to consider other factors, such as future earnings growth and the amount of investment needed in the future. You might want to check out this FREE analyst forecast visualization for the company.

Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

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