With a return on equity of 16%, has the management of Science Applications International Corporation (NYSE: SAIC) fared well?

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Many investors are still educating themselves about the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). To keep the lesson grounded in practice, we’ll use ROE to better understand Science Applications International Corporation (NYSE: SAIC).

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest review for Science Applications International

How is the ROE calculated?

the formula for ROE is:

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

Thus, based on the above formula, the ROE of Science Applications International is:

16% = US $ 256 million ÷ US $ 1.6 billion (based on the last twelve months to April 2021).

“Return” refers to a company’s profits over the past year. This means that for every dollar in 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. However, this method is only useful as a rough check, as companies differ a lot within a single industry classification. You can see from the graph below that Science Applications International has a ROE quite close to the professional services industry average (14%).

NYSE: SAIC Return on Equity August 17, 2021

It is neither particularly good nor bad. While at least the ROE is not lower than that of the industry, it is still worth checking out the role that corporate debt plays, as high levels of debt relative to equity can also make the ROE appear high. If this is true, it is more an indication of risk than potential. Our risk dashboard must include the 2 risks that we have identified for Science Applications International.

The importance of debt to return on equity

Most businesses need money – from somewhere – to increase their profits. This liquidity can come from retained earnings, the issuance of new shares (equity) or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of debt will improve returns, but will not affect equity. In this way, the use of debt will increase the ROE, even if the basic economy of the business remains the same.

Science Applications International’s debt and its ROE of 16%

Of note is Science Applications International’s high reliance on debt, resulting in a debt-to-equity ratio of 1.60. There is no doubt that his ROE is decent, but the company’s very high debt is not too exciting to see. Leverage increases risk and reduces options for the business in the future, so you usually want to get good returns using it.

Summary

Return on equity is useful for comparing the quality of different companies. Firms that can earn high returns on equity without taking on too much debt are generally of good quality. All other things being equal, a higher ROE is preferable.

But when a company is of high quality, the market often offers it up to a price that reflects that. It is important to take into account other factors, such as future profit growth and the amount of investment required for the future. So you might want to check out this FREE visualization of analyst forecasts for the business.

But beware : Science Applications International might not be the best stock to buy. So take a look at this free list of interesting companies with high ROE and low debt.

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