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Most readers would already be aware that DocuSign's (NASDAQ:DOCU) stock increased significantly by 12% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study DocuSign's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for DocuSign is:
53% = US$1.1b ÷ US$2.0b (Based on the trailing twelve months to January 2025).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.53 in profit.
View our latest analysis for DocuSign
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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
DocuSign's Earnings Growth And 53% ROE
First thing first, we like that DocuSign has an impressive ROE. Secondly, even when compared to the industry average of 15% the company's ROE is quite impressive. So, the substantial 79% net income growth seen by DocuSign over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that DocuSign's growth is quite high when compared to the industry average growth of 24% in the same period, which is great to see.
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 DOCU? You can find out in our latest intrinsic value infographic research report.