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Endava (NYSE: DAVA) has had a great run in the stock market, up 24% over the past three months. Since the market typically pays for a company’s long-term fundamentals, we decided to examine the company’s key performance indicators to see if they could affect the market. We’re going to pay special attention to Endava’s ROE today.
Return on Equity, or ROE, is an important factor to consider as a shareholder telling them how effectively their capital will be reinvested. In other words, it shows the company’s success in turning shareholder investments into profits.
Check out our latest analysis for Endava. at
How is the ROE calculated?
The ROE can be calculated using the formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Endava is:
12% = £ 34m ÷ £ 275m (based on the last 12 months ended March 2021).
The “return” is the annual profit. Another way to imagine this is that for every $ 1 in equity, the company made a profit of $ 0.12.
Why is ROE important to earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “withholds” and how effectively this is done, we can then estimate the earnings growth potential of a company. In general, all other things being equal, companies with high ROE and retained earnings will grow faster than companies that do not share these attributes.
Endava’s earnings growth and 12% ROE
At first, Endava appears to have a respectable ROE. Be that as it may, the company’s ROE is still well below the industry average of 17%. However, the moderate 13% net income growth Endava has seen over the past five years is definitely positive. So there could be other aspects that have a positive impact on earnings growth. For example, it is possible that management has made good strategic decisions or the company has a low payout ratio. Not to forget, however, that the company has a decent ROE to begin with, only that it is below the industry average. So this also provides some context for the company’s earnings growth.
Next, when we compared Endava’s net profit growth to the industry, we found that the company’s reported growth was the industry’s average growth rate of 15% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. Next, investors need to determine whether or not expected earnings growth is already included in the stock price. This then helps them determine whether the stock is placed for a bright or bleak future. A good indicator of expected earnings growth is the P / E ratio, which determines the price the market is willing to pay for a stock based on its earnings outlook. So you might want to check if Endava is trading at a high P / E ratio or a low P / E ratio compared to its industry.
Is Endava using its retained earnings effectively?
diploma
Overall, we’re pretty happy with Endava’s performance. We particularly like the fact that the company is massively reinvesting in its business with moderate returns. Unsurprisingly, this has resulted in impressive earnings growth. However, given the latest analyst estimates, we’ve determined that the company’s earnings are likely to gain momentum. Are these analyst expectations based on broad industry expectations or company fundamentals? Click here to go to our analysts forecast page for the company.
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This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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