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With its stock down 5.3% over the past week, it is easy to disregard Veeva Systems (NYSE:VEEV). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Veeva Systems' ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Veeva Systems
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 Veeva Systems is:
12% = US$666m ÷ US$5.5b (Based on the trailing twelve months to October 2024).
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 $0.12 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Veeva Systems' Earnings Growth And 12% ROE
To begin with, Veeva Systems seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 5.5%. Probably as a result of this, Veeva Systems was able to see a decent growth of 14% over the last five years.
As a next step, we compared Veeva Systems' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 23% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is VEEV worth today? The intrinsic value infographic in our free research report helps visualize whether VEEV is currently mispriced by the market.
Is Veeva Systems Using Its Retained Earnings Effectively?
Veeva Systems doesn't pay any regular dividends currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the decent earnings growth number that we discussed above.