With its stock down 36% in the past three months, it’s easy to overlook Simulations Plus (NASDAQ: SLP). However, stock prices are usually determined by a company’s long-term finances, which in this case seem quite respectable. In particular, we will pay close attention to the ROE of Simulations Plus today.
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 short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
Check out our latest analysis for Simulations Plus
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Simulations Plus is:
7.0% = $12 million ÷ $178 million (based on trailing twelve months to August 2022).
The “yield” is the amount earned after tax over the last twelve months. This therefore means that for every $1 of investment by its shareholder, the company generates a profit of $0.07.
What is the relationship between ROE and earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. 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.
Simulations Plus earnings growth and ROE of 7.0%
At first glance, the ROE of Simulations Plus does not look very promising. However, since the company’s ROE is similar to the industry average ROE of 8.0%, we can spare it some thought. Even so, Simulations Plus posted a pretty decent growth in its net profit which increased at a rate of 11%. Considering the fact that ROE is not particularly high, we believe that there could also be other factors at play that could influence the growth of the business. For example, the business has a low payout ratio or is efficiently managed.
Then, when comparing with industry net income growth, we found that Simulations Plus reported growth was lower than industry growth by 16% over the same period, which we don’t like. no see.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. What is SLP worth today? The intrinsic value infographic in our free research report helps visualize whether the SLP is currently being mispriced by the market.
Does Simulations Plus use its profits efficiently?
With a three-year median payout ratio of 46% (implying the company retains 54% of its earnings), it appears that Simulations Plus is effectively reinvesting to see respectable earnings growth and paying a dividend that is well covered.
Additionally, Simulations Plus is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years.
Summary
All in all, we think Simulations Plus definitely has some positives to consider. In other words, decent earnings growth supported by a high rate of reinvestment. However, we believe that this earnings growth could have been higher if the company were to improve the low ROE rate. Especially considering how the company reinvests a huge portion of its profits. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
What are the risks and opportunities for Simulation More?
Simulations Plus, Inc. develops drug discovery and development software for modeling, simulation, and prediction of molecular properties using artificial intelligence and machine learning-based technology worldwide.
See the full analysis
Awards
-
Revenues are expected to increase by 18.46% per year
-
Revenues have increased by 10.9% per year over the past 5 years
Risks
No risk detected for SLP of our risk audits.
See all risks and rewards
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.
#fundamentals #Simulations #NASDAQSLP #pretty #solid #market #wrong #stock