Sprinklr (NYSE:CXM) has had a rough three months, with its share price down 26%. But if you look closely, you’ll see that its key financial indicators are looking pretty decent, which could mean the stock could potentially rise in the long term, as markets typically reward more robust long-term fundamentals. In this article, we’ve focused on Sprinklr’s ROE.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investments it receives from its shareholders. Simply put, it is used to evaluate the profitability of a company relative to its equity.
Check out our latest analysis for Sprinklr
How do you calculate return on equity?
The Formula for return on equity Is:
Return on equity = Net profit (from continuing operations) ÷ Equity
Based on the above formula, the ROE for Sprinklr is:
9.7% = $59 million ÷ $611 million (based on the trailing twelve months ending April 2024).
The “return” is the income that the company generated in the last year. You can also imagine it like this: for every dollar of equity, the company was able to make $0.10 in profit.
What does return on equity (ROE) have to do with earnings growth?
So far we have learned that return on equity is a measure of a company’s profitability. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and profit retention will have a higher growth rate than companies that do not have these characteristics.
Sprinklr’s earnings growth and 9.7% ROE
At first glance, Sprinklr’s ROE is not particularly noteworthy. A quick further investigation shows that the company’s ROE also does not compare well to the industry average of 14%. However, we were pleasantly surprised to see that Sprinklr has been able to grow its net income by a remarkable 43% over the past five years. Therefore, there could be other reasons for this growth, such as high profit retention or efficient management.
Next, when comparing it with the industry’s net income growth, we found that Sprinklr’s growth is quite high compared to the average industry growth of 19% over the same period, which is encouraging.
The basis for valuing a company depends largely on its earnings growth. The investor should try to determine if the expected earnings growth or decline, whichever may be the case, is priced in. This will give him an idea of whether the stock is heading into clear blue waters or if swampy waters await. Has the market priced in the future prospects for CXM? Find out in our latest intrinsic value infographic research report.
Does Sprinklr reinvest its profits efficiently?
Sprinklr does not pay regular dividends to its shareholders, which means that the company has reinvested all of its profits into the business. This is likely the reason for the high earnings growth discussed above.
Summary
Overall, we feel that Sprinklr has some positive attributes. Despite its low ROE, the fact that the company reinvests a very high proportion of its profits into its business has undoubtedly contributed to its high earnings growth. However, recent industry analyst forecasts show that the company’s earnings growth is expected to slow. Are these analyst expectations based on broader expectations for the industry or on the company’s fundamentals? Click here to go to our analyst forecasts page for the company.
Do you have feedback on this article? Are you concerned about the content? Contact us directly from us. Alternatively, send an email to editorial-team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
