Declining Stock and Solid Fundamentals: Is The Market Wrong About ANSYS, Inc. (NASDAQ:ANSS)?

ANSYS (NASDAQ:ANSS) has had a tough three months with a price decline of 18%. But if you pay close attention, you might conclude that its strong financial position could mean the stock may appreciate in the long run, as markets typically reward companies with good financial health. In this article, we decided to focus on the ROE of ANSYS.

Return on equity or ROE is an important metric used to assess how efficiently a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability in relation to its equity.

look at the opportunities and risks within the US software industry.

How is ROE calculated?

The formula for ROE is:

Return on equity = net profit (from continuing operations) ÷ equity

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

10% = US$458 million ÷ US$4.5 billion (based on 12 months remaining to June 2022).

The “return” refers to a company’s profit over the past year. That means for every $1 in equity, the company generated $0.10 in profit.

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What does ROE have to do with earnings growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “keep”, we can then evaluate a company’s future ability to generate profits. Assuming all else remains unchanged, the higher the ROE and retained earnings, the higher a company’s growth rate compared to companies that don’t necessarily have these characteristics.

A side-by-side comparison of ANSYS earnings growth and 10% ROE

For starters, ANSYS’ ROE looks acceptable. Furthermore, the company’s ROE is comparable to the industry average of 13%. This certainly adds some context to ANSYS’s moderate 10% net income growth over the past five years.

Next, we compared ANSYS’s net income growth to the industry and found that the company’s growth rate is below the industry’s average growth rate of 26% over the same period, which is a little worrying.

past earnings growth
NasdaqGS:ANSS Past Earnings Growth, October 23, 2022

Earnings growth is a huge factor in stock valuation. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already built into the stock price. This then helps them determine whether the stock is positioned for a bright or bleak future. Has the market priced in the future outlook for ANSS? You can find out in our latest infographic research report on intrinsic value.

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Does ANSYS use the retained earnings effectively?

ANSYS does not pay a dividend, which means that all profits are reinvested in the company, which explains the company’s decent earnings growth.

Overview

All in all, we are quite satisfied with the performance of ANSYS. It is especially great to see that the company is investing heavily in its business and along with high returns, which has resulted in respectable growth in its revenues. That said, the latest forecasts from industry analysts show that the company’s earnings are expected to accelerate. Check this out to learn more about the company’s future earnings growth forecasts free analyst forecast report for the company to learn more.

This article from 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 shares and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analysis powered by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no position in said stocks.

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