Did Science Applications International Corporation (NYSE: SAIC) use debt to achieve its 16% ROE?

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One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will explain how we can use return on equity (ROE) to better understand a business. We’ll use ROE to look at Science Applications International Corporation (NYSE:SAIC), as a real-world example.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Science Applications International

How is ROE calculated?

ROE can be calculated using the formula:

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

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

16% = $271 million ÷ $1.7 billion (based on trailing 12 months to April 2022).

The “yield” is the amount earned after tax over the last twelve months. This means that for every dollar of shareholders’ equity, the company generated $0.16 in profit.

Does Science Applications International have a good return on equity?

Perhaps the easiest way to assess a company’s ROE is to compare it to the industry average. The limitation of this approach is that some companies are quite different from others, even within the same industrial classification. You can see in the chart below that Science Applications International has an ROE quite close to the professional services industry average (17%).

NYSE: SAIC Return on Equity July 11, 2022

So while the ROE isn’t exceptional, at least it’s acceptable. Although at least the ROE is not lower than the industry, it is always worth checking the role that the company’s debt plays, since high levels of debt relative to equity can also give the impression that the ROE is high. If so, it increases its exposure to financial risk.

What is the impact of debt on ROE?

Most businesses need money – from somewhere – to increase their profits. The money for the investment can come from the previous year’s earnings (retained earnings), from issuing new shares or from borrowing. In the first and second case, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt necessary for growth will boost returns, but will not impact shareholders’ equity. In this way, the use of debt will increase ROE, even though the core economics of the business remains the same.

Combine Science Applications International’s debt and its 16% return on equity

Of note is Science Applications International’s heavy use of debt, leading to its debt-to-equity ratio of 1.49. While its ROE is respectable, it’s worth bearing in mind that there’s usually a limit to the amount of debt a company can use. Debt increases risk and reduces options for the business in the future, so you generally want to see good returns using it.

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. If two companies have the same ROE, I would generally prefer the one with less debt.

But ROE is only one piece of a larger puzzle, as high-quality companies often trade on high earnings multiples. 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 Science Applications International may not be the best stock to buy. So you might want to see this free collection of other companies that have high ROE and low debt.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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