SPS Commerce, Inc. (NASDAQ:SPSC) Stock Performed Decently: Does Financials Matter?
Most readers already know that shares of SPS Commerce (NASDAQ:SPSC) are up 4.5% over the past three months. As most know, long-term fundamentals have a strong correlation with market price movements, so we decided to take a look at key business financial indicators today to see if they have a role to play. play in the recent price movement. Specifically, we decided to study the ROE of SPS Commerce in this article.
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 simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for SPS Commerce
How to 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 SPS Commerce is:
9.2% = $45 million ÷ $484 million (based on trailing 12 months to December 2021).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.09.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
SPS Commerce earnings growth and ROE of 9.2%
When you first look at it, SPS Commerce’s ROE doesn’t look so appealing. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 12%. However, we are pleasantly surprised to see that SPS Commerce has grown its net profit at a significant rate of 41% over the past five years. We believe there could be other factors at play here. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
We then benchmarked SPS Commerce’s net income growth with the industry and are pleased to see that the company’s growth figure is higher than the industry which has a 20% growth rate over the past of the same period.
Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. What is SPSC worth today? The intrinsic value infographic in our free research report visualizes whether SPSC is currently being mispriced by the market.
Is SPS Commerce using its profits efficiently?
Since SPS Commerce pays no dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.
Overall, we feel that SPS Commerce has positive characteristics. With a high reinvestment rate, albeit at a low ROE, the company managed to see considerable growth in earnings. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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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.