It’s hard to get excited after watching the recent performance of Sapiens International (NASDAQ:SPNS), as its stock is down 24% in the past three months. But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In this article, we decided to focus on the ROE of Sapiens International.
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 simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for Sapiens International
How to calculate return on equity?
the ROE formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Sapiens International is:
12% = $47 million ÷ $409 million (based on trailing 12 months to December 2021).
“Yield” is the income the business has earned over the past year. This means that for every dollar of shareholders’ equity, the company generated $0.12 in profit.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
Profit growth and ROE of 12% from Sapiens International
At first glance, Sapiens International seems to have a decent ROE. And comparing with the industry, we found that the industry average ROE is similar at 11%. This certainly adds some context to Sapiens International’s outstanding 37% net profit growth seen over the past five years. However, there could also be other drivers behind this growth. For example, the business has a low payout ratio or is efficiently managed.
We then compared the growth of net income of Sapiens International with the industry and we are happy to see that the growth figure of the company is higher compared to the industry which has a growth rate of 20% in during the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Is the SPNS correctly valued? This intrinsic business value infographic has everything you need to know.
Does Sapiens International use its profits effectively?
The three-year median payout ratio for Sapiens International is 43%, which is moderately low. The company retains the remaining 57%. At first glance, the dividend is well covered and Sapiens International is effectively reinvesting its profits, as evidenced by its exceptional growth, which we mentioned above.
In addition to seeing earnings growth, Sapiens International has only recently started paying dividends. It is quite possible that the company was trying to impress its shareholders. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 29% over the next three years. Thus, the expected decline in the payout ratio explains the expected increase in the company’s ROE to 14%, over the same period.
Overall, we are quite satisfied with the performance of Sapiens International. In particular, it is good to see that the company is investing heavily in its business and, along with a high rate of return, this has resulted in significant growth in its profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.