Simply Wall St

Decline in stocks and decent financials: Is the market wrong on Salesforce, Inc. (NYSE: CRM)?

Salesforce Inc (NYSE:CRM) had a tough three months with a 19% drop in its share price. However, the company’s fundamentals look pretty decent and long-term financials are generally in line with future market price movements. In this article, we decided to focus on Salesforce ROE.

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 simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for Salesforce

How do you calculate return on equity?

The ROE formula is:

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

So, based on the formula above, the ROE for Salesforce is:

0.9% = $536 million ÷ $60 billion (based on trailing 12 months to July 2022).

The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every dollar of share capital it has, the company has made a profit of $0.01.

What is the relationship between ROE and 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. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Salesforce earnings growth and ROE of 0.9%

As you can see, Salesforce’s ROE seems quite low. Even compared to the industry average of 13%, the ROE figure is quite disappointing. However, we are pleasantly surprised to see that Salesforce has grown its net profit at a significant rate of 29% over the past five years. We believe there could be other factors at play here. Such as – high revenue retention or effective management in place.

As a next step, we compared Salesforce’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 25% over the course of the year. same period.

NYSE:CRM ​​Past Earnings Growth November 20, 2022

Earnings growth is an important factor in stock valuation. 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 ominous. Has the market priced in the future prospects of CRM? You can find out in our latest infographic research report on intrinsic value.

Is Salesforce effectively using its profits?

Salesforce currently pays no dividends, which essentially means it has reinvested all of its earnings back into the company. This certainly contributes to the high earnings growth number we discussed above.

Summary

Overall, we think Salesforce has positive attributes. Even despite the low rate of return, the company has shown impressive earnings growth thanks to massive reinvestment in its business. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

Valuation is complex, but we help make it simple.

Find out if Selling power is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

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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.

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