Yahoo Finance EPAM Systems, Inc.'s (NYSE:EPAM) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?
With its stock down 14% over the past three months, it is easy to disregard EPAM Systems (NYSE:EPAM). 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 EPAM Systems' ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for EPAM Systems
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for EPAM Systems is:
12% = US$417m ÷ US$3.5b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. 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?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
EPAM Systems' Earnings Growth And 12% ROE
At first glance, EPAM Systems seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 12%. This certainly adds some context to EPAM Systems' moderate 15% net income growth seen over the past five years.
As a next step, we compared EPAM Systems' 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 14% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for EPAM? You can find out in our latest intrinsic value infographic research report.
Is EPAM Systems Using Its Retained Earnings Effectively?
Given that EPAM Systems doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Conclusion
In total, we are pretty happy with EPAM Systems' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
