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American Software, Inc. (NASDAQ:AMSW.A) Stock is on the Decline: Is Poor Fundamentals the Cause?

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It’s hard to get excited after looking at the recent performance of American Software (NASDAQ:AMSW.A), when its shares are down 20% in the past three months. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape long-term market trends. In this article, we decided to focus on the ROE of American Software.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is reinvested. In short, the ROE shows the return that each dollar generates with respect to the investments of its shareholders.

Check out our latest review of American Software

How to calculate return on capital?

the formula for return on capital is:

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

So, based on the formula above, the ROE for American Software is:

9.4% = $12 million ÷ $131 million (based on the last twelve months through January 2022).

The ‘yield’ is the income the business earned during the last year. Another way to think of that is that for every $1 of capital, the company was able to earn $0.09 in profit.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE is a measure of a company’s profitability. Based on how much of your earnings the company chooses to reinvest or “retain,” we can assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with a high return on capital and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of American Software’s earnings growth and ROE of 9.4%

At first glance, American Software’s ROE does not look very promising. However, its ROE is similar to the industry average of 10%, so we won’t rule the company out entirely. Having said that, American Software’s five-year net income decline rate was 12%. Note that the company has a slightly low ROE. Therefore, the decrease in earnings could also be a result of this.

However, when we compare American Software’s growth to the industry, we find that while the company’s earnings are down, the industry has seen 20% earnings growth over the same period. This is quite worrying.

past earnings growth

Earnings growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has priced in the growth (or decline) in the company’s expected earnings. By doing so, they will have an idea of ​​whether the stock is headed for clear blue waters or marshy waters await. Is AMSW.A fair value? This infographic on the intrinsic value of the company has everything you need to know.

Is American Software Efficiently Reinvesting Your Earnings?

With a three-year average payout ratio as high as 194%, American Software’s declining earnings come as no surprise as the company is paying a dividend that is beyond its means. Paying a higher dividend than reported earnings is not a sustainable move. You can view the 4 risks we have identified for American Software by visiting our risk board free on our platform here.

Furthermore, American Software has been paying dividends for a period of at least ten years, suggesting that maintaining dividend payments is much more important to management, even if it comes at the cost of business growth.

Conclution

Overall, American Software’s performance is a huge disappointment. Low ROE, combined with the fact that the company is paying out almost, if not all, of its earnings as dividends, has resulted in little or no earnings growth. That being the case, the latest forecasts from industry analysts show that analysts expect to see a big improvement in the company’s earnings growth rate. To learn more about the latest analyst predictions for the company, check out this visualization of analyst forecasts for the company.

Do you have comments about this article? Concerned about the content? Get in touch with us directly. Alternatively, email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock, and it does not take into account your goals or financial situation. Our goal is to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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