Is Bentley Systems, Incorporated’s (NASDAQ:BSY) ROE of 21% impressive?

While some investors are already familiar with financial metrics (hat trick), this article is for those who want to learn more about return on equity (ROE) and why it matters. To keep the lesson grounded in practicality, we’ll use ROE to better understand Bentley Systems, Incorporated (NASDAQ:BSY).

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Our analysis indicates that BSY is potentially undervalued!

How is ROE calculated?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Bentley Systems is:

21% = $103 million ÷ $497 million (based on trailing 12 months to June 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every dollar of shareholders’ equity, the company generated $0.21 in profit.

Does Bentley Systems have a good ROE?

A simple way to determine if a company has a good return on equity is to compare it to the average for its industry. However, this method is only useful as a rough check, as companies differ quite a bit within the same industry classification. Fortunately, Bentley Systems has an ROE above the software industry average (13%).

NasdaqGS:BSY Return on Equity October 25, 2022

It’s a good sign. However, keep in mind that a high ROE does not necessarily indicate efficient profit generation. Especially when a company uses high levels of debt to finance its debt, which can increase its ROE, but the high leverage puts the company at risk. To learn about the 3 risks we have identified for Bentley Systems, visit our free Risk Dashboard.

Why You Should Consider Debt When Looking at ROE

Virtually all businesses need money to invest in the business, to increase their profits. The money for the investment can come from the previous year’s earnings (retained earnings), from issuing new shares or from borrowing. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, debt used for growth will enhance returns, but will not affect total equity. So using debt can improve ROE, but with the added risk of stormy weather, metaphorically speaking.

Combine Bentley Systems debt and its 21% return on equity

It appears that Bentley Systems is using a huge volume of debt to finance the company, as it has an extremely high debt-to-equity ratio of 3.68. Its ROE is respectable, but it’s not that impressive once you consider all of the debt.

Conclusion

Return on equity is a way to compare the business quality of different companies. Companies that can earn high returns on equity without too much debt are generally of good quality. If two companies have roughly the same level of debt and one has a higher ROE, I generally prefer the one with a higher ROE.

But when a company is of high quality, the market often gives it a price that reflects that. Earnings growth rates, relative to expectations reflected in the share price, are particularly important to consider. You might want to take a look at this data-rich interactive chart of the company’s forecast.

Sure Bentley Systems may not be the best stock to buy. So you might want to see this free collection of other companies that have high ROE and low debt.

Valuation is complex, but we help make it simple.

Find out if Bentley Systems is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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