Aspen Technology (NASDAQ: AZPN) shares rose 25% in the past month. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. In this article, we have decided to focus on the ROE of Aspen Technology.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.
See our latest review for Aspen Technology
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, based on the above formula, the ROE of Aspen Technology is:
47% = US $ 326 million Ã· US $ 692 million (based on the last twelve months to September 2021).
“Return” refers to a company’s profits over the past year. Another way to look at this is that for every dollar of equity, the company was able to make $ 0.47 in profit.
Why is ROE important for profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Aspen Technology profit growth and 47% ROE
For starters, Aspen Technology has a pretty high ROE, which is interesting. Second, a comparison with the industry-reported average ROE of 12% doesn’t go unnoticed for us either. It is probably because of this that Aspen Technology has been able to achieve decent net income growth of 12% over the past five years.
As a next step, we compared Aspen Technology’s net income growth with the industry and were disappointed to see that the company’s growth is below the industry average growth of 22% over the past year. same period.
Profit growth is a huge factor in the valuation of stocks. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or worrisome. Has the market taken into account the future prospects of AZPN? You can find out in our latest Intrinsic Value infographic research report.
Is Aspen Technology Efficiently Reinvesting Its Profits?
Aspen Technology does not pay any dividends, which means all of its profits are reinvested in the business, which explains the good earnings growth the company has experienced.
Overall, we think Aspen Technology’s performance has been quite good. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. As a result, its decent profit growth is not surprising. The latest forecasts from industry analysts show the company is expected to maintain its current growth rate. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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