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Perficient (NASDAQ:PRFT) has had a great run on the share market with its stock up by a significant 15% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Perficient’s ROE today.
Return on equity or ROE is a key metric used to evaluate how successfully a company’s control uses the company’s equity. In other words, it is a profitability index that measures the rate of return on the capital contributed through the company’s shareholders.
See our latest analysis for Perficient
The ROE can be calculated using the formula:
Return on Equity = Net Income (from Continuing Operations) ÷ Stockholders’ Equity
So, based on the above formula, the ROE for Perficient is:
20% = USD 102 million ÷ USD 503 million (based on the trailing twelve months to September 2023).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.20 in profit.
So far, we’ve learned that ROE is a measure of a company’s ability to generate profits. Based on how much of its profits the company decides to reinvest or “hold,” we can assess a company’s ability to generate long-term profits. Assuming All Else Is Equal, corporations that have a higher return on equity and higher earnings retention are those that have a higher rate of expansion than corporations that don’t have the same characteristics.
To start with, Perficient’s ROE looks acceptable. Especially when compared to the industry average of 13% the company’s ROE looks pretty impressive. This certainly adds some context to Perficient’s exceptional 32% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Perficient’s growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.
Earnings growth is a vital metric when valuing a stock. What investors must then determine is whether the expected increase in earnings, or lack thereof, is already priced into the stock price. By doing so, they’ll have an idea of whether the stock is heading towards clear blue waters or if swampy waters await. Is PRFT priced? This intrinsic pricing infographic has everything you want to know.
Perficient doesn’t pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what’s driving the high earnings growth number discussed above.
In total, we are pretty happy with Perficient’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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