How did Science Applications International Corporation’s (NYSE:SAIC) ROE of 18% fare relative to the industry?

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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. To keep the lesson grounded in practicality, we’ll use ROE to better understand Science Applications International Corporation (NYSE:SAIC).

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for Science Applications International

How do you calculate return on equity?

the return on equity formula East:

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

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

18% = $296 million ÷ $1.6 billion (based on trailing 12 months to October 2021).

“Yield” is the income the business has earned over the past year. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.18.

Does Science Applications International have a good return on equity?

A simple way to determine if a company has a good return on equity is to compare it to the average for its industry. It is important to note that this measure is far from perfect, as companies differ significantly within the same industry classification. The image below shows that Science Applications International has an ROE that is roughly in line with the professional services industry average (16%).

NYSE: SAIC Return on Equity February 21, 2022

So, although the ROE is not exceptional, it is at least 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 a company takes on too much debt, it runs a higher risk of defaulting on interest payments. To learn about the 2 risks we have identified for Science Applications International visit our risk dashboard for free.

The Importance of Debt to Return on Equity

Most businesses need money – from somewhere – to increase their profits. This money can come from retained earnings, issuing new stock (shares), or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the use of debt will improve returns, but will not change equity. In this way, the use of debt will increase ROE, even though the core economics of the business remains the same.

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

Science Applications International uses a high amount of debt to increase returns. Its debt to equity ratio is 1.60. Although its ROE is quite respectable, the amount of debt the company is currently carrying is not ideal. Debt increases risk and reduces options for the business in the future, so you generally want to see good returns using it.

Conclusion

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 take a look at this data-rich interactive chart of the company’s forecast.

If you’d rather check out another company – one with potentially superior finances – then don’t miss this free list of attractive companies, which have a high return on equity 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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