Can Technology One Limited (ASX: TNE) keep its strong returns?

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<p class = "Canvas-Atom-Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Many investors learn something about the different metrics that This article is for those who want to learn more about Return on Equity (ROE). We use the ROE to help Technology One Limited (ASX: TNE), based on a practical example. "data-reactid =" 27 "> Many investors are still learning the various metrics that can help analyze a stock. This article is for those who want to learn about return on equity (ROE). We will use ROE to examine Technology One Limited (ASX: TNE) using an example.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Technology One has an ROE of 55%, based on the past twelve months. One way to imagine this is that the company made a profit of A $ 0.55 for every A $ 1 of equity. "Data reactid =" 28 ">Technology One has an ROE of 55%, based on the past twelve months. One way to present this is for the company to make a profit of A $ 0.55 for every A $ of equity.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Check out our latest analysis for Technology One "data-reactid =" 29 "> Check out our latest analysis for Technology One

How do you calculate the ROE?

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "The Formula for ROE is: "data-reactid =" 31 "> The Formula for ROE is:

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

Or for Technology One:

55% = AU $ 58 million ÷ AU $ 107 million (based on the last twelve months to September 2019.)

Most people know that the net profit is the total after all expenses, but the concept of equity is a little more complicated. This is the total amount of money deposited into the company by shareholders plus any retained earnings. You can calculate equity by subtracting the company's total liabilities from total assets.

What does ROE mean?

<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "ROE considers the amount a company earns in relation to the money it kept in business. The "rate of return" is the amount that has been earned after taxes in the last 12 months. That is, the higher the ROE, the more profitable the company is. So, everything else is the same, A high ROE is better than a low one, That said, it can be interesting to compare the returns of different companies. "Data-reactid =" 37 "> The rate of return refers to the amount that a company makes in relation to the money that it has kept in the company. The" rate of return "is the amount that it has earned after tax in recent years twelve months, ie the higher the ROE, the more profitable the company is. A high ROE is better than a low one, That said, it can be interesting to compare the ROE of different companies.

Does the technology have a good ROE?

An easy way to determine if a company has a good return on equity is to compare it to the industry average. The limitation of this approach is that some companies also differ significantly from others within the same industry classification. As you can see in the graphic below, Technology One has a higher ROE than the average (15%) in the software industry.

ASX: TNE Past Revenue and Net Income, January 11, 2020

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "That's what I like to see. I usually take one Take a closer look if a company has a better return than other companies in the industry. One data point to check is whether Insiders recently bought shares, "data-reactid =" 52 "> That's what I like to see. I usually take a closer look when a company has a better ROE than industry peers. One data point to check is whether Insiders recently bought shares,

How does debt affect ROE?

Businesses usually have to invest money to increase their profits. The money for investments can come from the previous year's profit (retained earnings), the issue of new shares or the taking out of loans. In the first and second cases, the ROE will reflect this use of cash to invest in the company. In the latter case, the debt used for growth improves returns, but does not affect total equity. Thus, the use of debt can improve ROE, although, metaphorically speaking, there is an additional risk in stormy weather.

Technology One's debt and its 55% ROE

Shareholders will be happy to learn that Technology One does not have an iota of net debt! The high return on investment already indicates high quality business, but the lack of debt is a cherry on top. After all, a company with cash and cash equivalents has a lot more choices in both good and bad times.

But it's just a metric

The return on equity is one way to compare the business quality of different companies. Companies that can achieve a high return on equity without excessive debt are generally of good quality. In general, if two companies have the same ROE, I would prefer the one with less debt.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "But ROE is only part of a larger puzzle because high quality Companies often trade with a high multiple of earnings, it is important to consider other factors, such as future profit growth and future investment needs Visualization of analyst forecasts for the companyEmagazine.credit-suisse.com/app/art…7805 & lang = DE But the ROE is only part of a larger puzzle, since high – quality companies often trade with a high multiple of the revenue. It is important to consider other factors, such as future earnings growth – and how, since there is a lot to invest in the future, you should check out this FREE visualization of analyst forecasts for the company.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Of course You could find a fantastic investment if you look elsewhere. So take a look free List of interesting companies."data-reactid =" 64 "> Of course You could find a fantastic investment by looking elsewhere. So take a look free List of interesting companies.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com, This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading."data-reactid =" 65 ">If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.