Read This Before Judging Progress Software Corporations (NASDAQ:PRGS) ROE – Simply Wall St

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. To keep the lesson grounded in practicality, well use ROE to better understand Progress Software Corporation (NASDAQ:PRGS).

Progress Software has a ROE of 8.0%, based on the last twelve months. One way to conceptualize this, is that for each $1 of shareholders equity it has, the company made $0.08 in profit.

View our latest analysis for Progress Software

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) Shareholders Equity

Or for Progress Software:

8.0% = US$26m US$330m (Based on the trailing twelve months to November 2019.)

Most know that net profit is the total earnings after all expenses, but the concept of shareholders equity is a little more complicated. It is all the money paid into the company from shareholders, plus any earnings retained. Shareholders equity can be calculated by subtracting the total liabilities of the company from the total assets of the company.

ROE measures a companys profitability against the profit it retains, and any outside investments. The return is the profit over the last twelve months. The higher the ROE, the more profit the company is making. So, as a general rule, a high ROE is a good thing. Clearly, then, one can use ROE to compare different companies.

By comparing a companys ROE with its industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. As shown in the graphic below, Progress Software has a lower ROE than the average (11%) in the Software industry classification.

That certainly isnt ideal. It is better when the ROE is above industry average, but a low one doesnt necessarily mean the business is overpriced. Nonetheless, it could be useful to double-check if insiders have sold shares recently.

Companies usually need to invest money to grow their profits. That cash can come from issuing shares, retained earnings, or debt. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt used for growth will improve returns, but wont affect the total equity. That will make the ROE look better than if no debt was used.

While Progress Software does have some debt, with debt to equity of just 0.89, we wouldnt say debt is excessive. Its ROE isnt particularly impressive, but the debt levels are quite modest, so the business probably has some real potential. Judicious use of debt to improve returns can certainly be a good thing, although it does elevate risk slightly and reduce future optionality.

Return on equity is useful for comparing the quality of different businesses. In my book the highest quality companies have high return on equity, despite low debt. All else being equal, a higher ROE is better.

But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So I think it may be worth checking this free report on analyst forecasts for the company.

Of course Progress Software may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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Read This Before Judging Progress Software Corporations (NASDAQ:PRGS) ROE - Simply Wall St