Amdocs (NASDAQ:DOX) has had a steep decline in share price of 17% during the last three months. However, if you look closely, you could notice that given how markets typically reward companies with great financial health, its strong financials could suggest that the stock could potentially experience a gain in value over time. We made the decision to highlight Amdocs’ ROE in this piece.
One important metric for evaluating how well a company’s management is using its capital is return on equity, or ROE. Put more simply, it assesses a company’s profitability in relation to the equity held by its shareholders.
As we’ve already shown, return on equity (ROE) is a highly effective indicator of future profits for a business. The amount of a company’s profits that it decides to “retain” or reinvest allows us to assess how profitable it will be going forward. When comparing companies with similar qualities to those without, those with stronger profit retention and return on equity typically have faster growth rates, assuming all else is equal.
Amdocs’ ROE first appears to be reasonable. Additionally, the business’s ROE is comparable to the 16% industry average. Among other things, this presumably helps to explain Amdocs’ modest 8.7% growth over the last five years.
Next, we discovered that Amdocs’ reported growth was less than the industry growth of 23% over the previous few years when we compared the company’s net income growth to that of the industry. This is not something we would like to see.
A company’s worth is largely determined by the rate at which its earnings are growing. If earnings are predicted to grow or drop, as the case may be, the investor should attempt to determine if it is priced in. By doing this, they will be able to determine if the stock’s future appears bright or bleak. How much is Amdocs worth in relation to other companies? You could make a decision using these three valuation metrics.
Amdocs has demonstrated effective utilisation of its profits, as evidenced by the company’s healthy combination of a moderate three-year median payout ratio of 34% (or a retention ratio of 66%) and a fair amount of earnings growth, as we saw above.
Furthermore, as seen by its lengthy history of paying a dividend for a minimum of ten years, Amdocs is committed to continuing to distribute its profits to shareholders. Based on an analysis of the most recent consensus data from analysts, it is anticipated that the corporation will continue to distribute roughly 28% of its profits for the ensuing three years. Even though it is anticipated that Amdocs’ payout ratio will remain relatively constant, projections indicate that the company’s ROE will increase to 22% in the future.
We are happy with Amdocs’ performance overall. It’s particularly encouraging to observe that the company is making significant investments in its operations, which, along with a strong rate of return, have led to a respectable increase in earnings. In light of this, the most recent analyst projections indicate that the company’s earnings will continue to grow.