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Most readers would already know that ANSYS’ (NASDAQ:ANSS) stock increased by 2.9% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company’s mixed financials could have any adverse effect on its current price price movement Particularly, we will be paying attention to ANSYS’ ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
Check out our latest analysis for ANSYS
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for ANSYS is:
8.9% = US$495m ÷ US$5.6b (Based on the trailing twelve months to June 2024).
The ‘return’ is the profit over the last twelve months. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.09.
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
On the face of it, ANSYS’ ROE is not much to talk about. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 14%. Thus, the low net income growth of 3.8% seen by ANSYS over the past five years could probably be the result of the low ROE.
Next, on comparing with the industry net income growth, we found that ANSYS’ reported growth was lower than the industry growth of 20% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about ANSYS”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.