Simply Wall St

Declining Stock and Decent Financials: Is The Market Wrong About Salesforce, Inc. (NYSE:CRM)?

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

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

See our latest analysis for Salesforce

How Do You Calculate Return On Equity?

Tea formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

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

0.9% = US$536m ÷ US$60b (Based on the trailing twelve months to July 2022).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.01 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

Salesforce’s Earnings Growth And 0.9% ROE

As you can see, Salesforce’s ROE looks pretty weak. Even when compared to the industry average of 13%, the ROE figure is pretty disappointing. However, we we’re pleasantly surprised to see that Salesforce grew its net income at a significant rate of 29% in the last five years. We reckon that there could be other factors at play here. Such as – high earnings retention or an efficient 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 when compared with the industry average growth rate of 25% in the same period.

NYSE: CRM Past Earnings Growth November 20th 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for CRM? You can find out in our latest intrinsic value infographic research report.

Is Salesforce Making Efficient Use Of Its Profits?

Salesforce doesn’t pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

On the whole, we do feel that Salesforce has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Valuation is complex, but we’re helping make it simple.

Find out whether Salesforce is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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