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With its stock down 9.0% over the past month, it is easy to disregard Salesforce (NYSE:CRM). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on Salesforce's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Salesforce

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Salesforce is:

0.7% = US$379m ÷ US$57b (Based on the trailing twelve months to April 2023).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.01.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Salesforce's Earnings Growth And 0.7% ROE

It is hard to argue that Salesforce's ROE is much good in and of itself. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. Therefore, Salesforce's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Story continues

We then compared Salesforce's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 19% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is CRM worth today? The intrinsic value infographic in our free research report helps visualize whether CRM is currently mispriced by the market.

Is Salesforce Efficiently Re-investing Its Profits?

Salesforce doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

On the whole, we feel that the performance shown by Salesforce can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

It has been a rocky earnings season so far. Investors have demanded nothing short of perfection to justify sky-high valuations; even when companies beat guidance and Wall Street expectations, big losses are ensuing as the markets unwind a chunk of the past months' interest rate-driven rally.

Salesforce.com (NYSE:CRM) doesn't report earnings until the end of August, but the stock is already down ~10% since the start of the month in tandem with other big tech names. And though the stock remains up more than 50% from a year-to-date basis, I think this dip is a great entry point in this software giant:

Salesforce is finally taking profitability seriously

A well-known adage is that a good crisis can often present a great opportunity. For much of the past decade, Salesforce.com was riding high on the cloud boom, easy and cheap money, and skyrocketing valuations. It may have been one of the key poster children for excess in the tech sector, and its corporate strategy wasn't far off either: as organic growth slowed, Salesforce deployed its balance sheet for aggressive M&A, acquiring the likes of Tableau, MuleSoft, Slack, and Quip for billions to expand its cloud software empire.

Amid greater macro pressure, however, Salesforce has started to show more discipline. M&A and the costs of integrating acquired targets have long held Salesforce's operating margins down. Headcount expansion to fill offices across the world, including in its home city of San Francisco where Salesforce Tower and many other high-rises are sitting at low occupancy, has held off profitability. True: Salesforce was the original blueprint for a high-growth software company that would initially burn lots of cash but become incredibly profitable later at a more mature stage, on the back of high gross margins and recurring revenue.

That "later" took many years to arrive, but I believe we're finally there. The company has finally turned its focus to the bottom line, laying off a slew of workers this year. And since the Slack deal in 2021, the company has not acquired another major target since.

Valuation looks buyable, on either an earnings or revenue basis

And so, at long last: The company is finally expanding its bottom line in a meaningful way. Its valuation can also be supported by its earnings. For the next fiscal year FY25 (the year for Salesforce ending in January 2025), Wall Street expects Salesforce to generate $8.99 in pro forma EPS, up 21% y/y on the back of $38.4 billion in revenue, up 11% y/y.

At current share prices near $209, this puts Salesforce's valuation at 23.2x FY25 P/E - which, for a company expected to grow pro forma earnings at north of a >20% clip, is quite attractive (considering a high-teens multiple for the S&P 500 which is weighed down by much slower-growing industries).

On a traditional revenue basis: Currently, Salesforce's market cap sits at $203.27 billion, and after netting off the $13.98 billion of cash and $9.60 billion of debt on Salesforce's most accurate balance sheet, its resulting enterprise value is $198.89 billion. So against consensus FY25 revenue targets, Salesforce's revenue-based valuation stands at 5.2x EV/FY25 revenue - again, not unreasonable.

My year-end price target on Salesforce is $243, representing a 27x FY25 P/E multiple or a 6x FY25 revenue multiple.

The long-term bull case for Salesforce

When we look beyond the short term for Salesforce, I find quite an attractive multi-year bull case for this company.

The key upside catalysts I see are:

• Best-in-breed reputation will shield Salesforce as smaller competitors dry up. In the software industry, few brands are as recognizable as Salesforce, particularly in the CRM space, where Salesforce has a dominant market share. Amid a tough macro environment where many smaller software companies are folding, Salesforce will continue to gain share.
• Very diverse array of software products. Though we may decry Salesforce's past penchant for acquisitions, the truth is that Salesforce is now left with a very wide net of software products, all of which carry strong cross-selling potential. Outside of its core CRM and marketing tools, Salesforce has enterprise communication via Slack and Quip, API tools via MuleSoft, BI via Tableau, and a variety of other best-in-class software offerings.
• Pure recurring revenue. Outside of one-time professional services and implementations which make up a very tiny portion of Salesforce's revenue, Salesforce is unsurprisingly built on an entirely recurring subscription revenue base. Given as well that most of Salesforce's products are seat-based (meaning it's priced per user), Salesforce has plenty of opportunity to expand within its current install base as well.
• RPOs continue building. Remaining performance obligations, which is a measure of Salesforce's contracted subscription revenue, continue to build at a nearly equivalent pace as revenue, which is a strong leading indicator that revenue deceleration isn't in the near-term cards.
• Rule of 40. Salesforce has a high-20s pro forma operating margin and mid-teens revenue growth and classifies as a "Rule of 40" software stock - which makes Salesforce even more appealing in the current market which has shifted away from a growth-first mindset to one that considers bottom-line expansion as well. Salesforce also generates healthy free cash flow that adds an additional buffer on top of a balance sheet loaded with more than $13 billion in cash, which is useful fodder for its regular acquisitions.

Stay long here and buy the dip.

Recent trends show healthy growth across cloud verticals amid margin expansion

Though Salesforce has been hit by its fair share of macro slowdown impacts - which, in the software sector, has delayed IT purchases and increased scrutiny on deal approvals, lengthening the sales cycle - it is still showing growth across all of its key cloud verticals while also boosting profitability.

The chart above shows that each of Salesforce's core cloud verticals saw double-digit growth on a constant-currency basis in Q1 - including and especially Sales Cloud, Salesforce's core CRM product that started the company. It's worth noting as well that Tableau, which wasn't much of a growth champion when Salesforce acquired it in 2019, saw revenue growth accelerate to 12% y/y in the quarter, which helped to offset MuleSoft's declaration in the "Data" segment. Looking at the chart above, FX-neutral revenue growth in the Data cloud has accelerated substantially versus early FY23.

The company's core priority now, however, is the bottom line: A sentiment echoed by founder and CEO Marc Benioff on the accurate Q1 earnings call:

On our last call in March, we told you about how Salesforce had radically accelerated our transformation to profitable growth. We share with you how we hit the hyperspace button across the key areas of our transformation, restructuring for the short and long-term, reigniting our performance culture by focusing on productivity, operational excellence, and profitability, prioritizing our core innovations that drive customer success, building even stronger relationships with you, our investors.

Our Q1 results show that we continue to make great progress. As I said in March, we're just getting started with this incredible transformation. We continue to scrutinize every dollar investment, every resource, and every spend and we're transforming every corner of our company. Our progress over the last 5 months, while it's very impressive and I cannot be more grateful to our entire team for their leadership. In fact, you may hear me say that several times on this call. Our transformation drove our Q1 financial results.

As I said, on our last call, well improving profitability is our highest priority. As a result, we significantly exceeded our margin target for the quarter, delivering a non-GAAP operating margin of 27.6%, up 1,000 basis points year-over-year, incredible. And there's no greater point of evidence to our transformation than this amazing result following the tremendous operating margin Q4."

The chart below shows Salesforce's progress: The majority of the 10-point improvement in margins came from reducing sales and marketing costs as a percentage of revenue by 6 points:

Pro forma operating income soared 74% y/y on a nominal basis to $2.27 billion, representing a 27.4% margin - which, when stacked on top of 13% constant-currency revenue growth, still squarely puts Salesforce in the "Rule of 40" category. Pro forma EPS, meanwhile, grew 72% y/y to $1.69.

Key takeaways

Salesforce has hidden its profitable bones underneath a mass of corporate hiring and a multi-year M&A shopping spree, but as the company turns its focus to efficiency and profitability, we're starting to see the benefits of massive operating income and EPS growth. Don't forget top-line strength as well, as Salesforce continues to leverage the breadth of its product portfolio to sustain double-digit growth across each of its key product lines. Stay long here and buy the dip.

In the ever-evolving landscape of business technology, adapting to change is no longer a choice — it’s a necessity. And when it comes to managing those changes seamlessly, Salesforce stands tall as a powerhouse. However, navigating the intricate realm of Salesforce Change Management can often leave even the most seasoned professionals scratching their heads.

We unveil six invaluable tips that promise to unravel the complexities, making the process not just manageable, but downright straightforward. Whether you’re a salesforce novice or a seasoned pro, these insights will empower you to wield change as a tool for growth, without breaking a sweat.

Clear Change Identification and Prioritization

Before embarking on any salesforce changes, it’s essential to meticulously define the scope and objectives of the proposed modifications. This involves a detailed analysis of the current system, identifying pain points, and recognizing opportunities for enhancement. Once potential changes are identified, a rigorous prioritization process should be employed.

This prioritization should be based on factors such as the anticipated business impact, alignment with strategic goals, and feasibility of implementation. The impacts of any change should be thoroughly evaluated, considering both short-term and long-term consequences. This includes assessing potential disruptions to existing processes, workflows, and user experiences, as well as estimating the financial, resource, and time investments required for successful implementation.

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Cross-Functional Collaboration

Successful salesforce change management thrives on collaborative efforts across diverse departments. Forming a dedicated change management team comprising representatives from different functional areas fosters a holistic approach. Involving stakeholders early in the process ensures that all perspectives are considered, mitigating resistance and enhancing buy-in.

Open communication channels must be established to facilitate idea sharing, status updates, and issue resolution. This collaborative synergy not only promotes comprehensive change planning but also empowers a sense of ownership among stakeholders. By uniting expertise and insights from various disciplines, organizations can navigate change with collective strength and drive more successful implementations.

Comprehensive Change Documentation

Thorough documentation is the backbone of effective salesforce change management. Detailed records of change requests, requirements, and implementation plans ensure a clear roadmap for all involved. A well-maintained repository of version-controlled documentation facilitates transparency, aiding in tracing the evolution of changes and reducing confusion. This meticulous documentation also supports knowledge transfer, enabling seamless onboarding and continuity.

By meticulously capturing every step and decision, organizations establish a reliable foundation for change, ensuring that stakeholders remain informed and aligned throughout the process. Robust documentation safeguards against uncertainties and serves as a valuable resource for future enhancements.

Thorough Testing and Quality Assurance

Rigorous testing and quality assurance are cornerstones of successful Salesforce change management. Crafting comprehensive test plans and scenarios allows for the meticulous examination of new configurations and functionalities. User Acceptance Testing (UAT) involving end-users validates the changes from a practical standpoint, ensuring they meet user needs and expectations.

Addressing any detected bugs, performance issues, or discrepancies during testing guarantees a smoother transition. A robust testing phase minimizes post-implementation disruptions and fosters user confidence. By prioritizing quality assurance, organizations fortify their change management process, delivering dependable solutions that align seamlessly with business objectives.

User Training and Support

Empowering users through effective training and ongoing support is pivotal in salesforce change management. Developing comprehensive training materials, including guides and tutorials, equips users with the knowledge to navigate new features and processes. Conducting engaging training sessions and workshops enhances user proficiency and fosters a positive transition experience.

Providing accessible avenues for user support, such as help desks or forums, ensures timely issue resolution and knowledge sharing. Prioritizing user training and support cultivates user confidence, reduces frustration, and promotes efficient utilization of the salesforce platform, ultimately contributing to the success of change initiatives.

Effective Change Rollout and Monitoring

A well-executed change rollout and vigilant monitoring are pivotal to salesforce change management success. Careful planning of controlled rollouts or pilot launches ensures gradual adoption and minimizes disruption. Monitoring user adoption, feedback, and system performance provides valuable insights into the effectiveness of implemented changes. Iterative improvements based on real-time data help fine-tune configurations and address evolving needs.

This proactive approach guarantees that the change’s impact aligns with expectations, promoting sustained user satisfaction. By maintaining a watchful eye on the ongoing change process, organizations can swiftly adapt, optimize, and enhance the Salesforce environment, driving long-term success and continuous improvement.

Simplifying Salesforce change management is a multi-faceted endeavor that demands strategic planning, collaboration, documentation, testing, training, and vigilant monitoring. By adhering to these key principles, organizations can navigate transitions with clarity, engage stakeholders effectively, and ensure seamless system enhancements. Embracing change as an iterative process allows for agility and continuous improvement, leading to a Salesforce environment that not only meets current needs but also lays a solid foundation for future innovation and success.

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Salesforce cannot lean on Section 230 of the Communications Decency Act—a go-to defense for technology companies—to shield itself from civil liability stemming from its work for defunct website Backpage.

In a 2-1 decision on Aug. 3, the U.S. Court of Appeals for the Seventh Circuit Court reversed an Illinois district court that had found Salesforce couldn’t be held liable for participant liability in a case brought on behalf G.G., who was trafficked on Backpage when she was 13-years old. In particular, the court’s majority held that G.G. and her mother were not required to show that Salesforce, which allegedly provided custom software to Backpage, specifically knew that the site was trafficking the plaintiff. To survive a motion to dismiss, she need only allege Salesforce knew that Backpage was a trafficking venture it was profiting from.

Diagnoses of early-onset cancers — those affecting people 50 and younger — spiked between 2010 and 2019, according to a study published in JAMA Network Open this week.

The fastest-growing type was gastrointestinal cancer, which rose 14.80%, followed by cancer of the endocrine system (8.69%) and breast cancer (7.7%).

Gastrointestinal cancer originates anywhere along the digestive tract, including the esophagus, small intestine, stomach, pancreas, colon, bile duct, gall bladder, liver, anus and rectum.

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Despite gastrointestinal cancer’s sharp increase, breast cancer still had the highest total number of cases among those 50 and under in 2019.

A team of researchers led by the National University of Singapore analyzed data from 17 national cancer registries from Jan. 1, 2010, to Dec. 31, 2019, according to the journal article discussing the study.

The researchers found that in the study period, the overall incidence of early-onset cancers increased — while it decreased for those over 50.

"The increase in early-onset cancers is likely associated with the increasing incidence of obesity as well as changes in environmental exposures, such as smoke and gasoline, sleep patterns, physical activity, microbiota and transient exposure to carcinogenic compounds," the study authors wrote in the journal.

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"Early-onset cancer is associated with substantial mortality and morbidity," the authors added.

Findings confirm ‘disturbing trend,’ says expert

Dr. Monique Gary, medical director of the Grand View Health/Penn Cancer Network in Pennsylvania, where she also serves as director of the breast program, was not involved in the study but reviewed the findings.

"The study is further evidence of a disturbing trend that physicians have more than anecdotally known to be true, which is that cancer rates are increasing in younger individuals," she told Fox News Digital.

"It is not surprising that the risk factors associated with increased cancer incidence are largely preventable," she added.

"Future studies will be very telling with respect to the impact that COVID-19 has had upon these preventable risk factors in younger populations."

These risk factors — obesity, tobacco and alcohol intake, sedentary lifestyles, and decreased quality and lack of adequate rest — were all exacerbated during the pandemic, the doctor noted.

"Future studies will be very telling with respect to the impact that COVID-19 has had upon these preventable risk factors in younger populations," she added.

Among all the risk factors cited, the impacts of stress and a sedentary lifestyle have been most underestimated, the doctor said.

"While we are becoming more adept at understanding lifestyle factors that influence cancer risk, a lot of work still needs to be done to understand the biological mechanisms," she said.

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"Every day, we are uncovering new information regarding the complexities of cancer, and we are at a crossroads now, where we should challenge our understanding of cancer as a disease of aging."

Know the ways to keep cancer at bay

While there are underlying genetic factors and biomarkers of the disease, Dr. Gary emphasized the need to find ways to reduce chronic and preventable illness to "reverse the trend of climbing rates of malignancy."

"Breast and gynecological cancers continue to have the highest incidence in 30- to 39-year-olds, and this should prompt a close examination of the screening, best practices, guidelines and risk-reducing strategies for individuals within this age group — especially those with family history and other non-preventable risk factors," she said.

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The doctor also stressed the need to focus on mental health and diet, as well as social determinants of health that influence these risk factors. 

"The most important thing to do is to act, to move your body," she said. "COVID forced people of all ages to shelter at home, and most of us have adapted to an increased sedentary lifestyle as a result."

She added, "We need to make sure we prioritize an active lifestyle, and even a small action can make a big difference."

"The most important thing to do is to act, to move your body."

It is also important to adopt the principle of "food as medicine," Gary said. 

"Plant-forward diets high in antioxidants and cruciferous vegetables help to decrease cancer risk," she noted. 

"We also know, as highlighted in this study, that tobacco (in all forms, including vaping) and alcohol intake is a major factor, and it’s important to be aware of our habits and how to manage them."

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"The beauty of wellness is that when we work to Improve one area, the benefits extend to other areas as well," she said. 

"Cancer risk is an important and major consideration and risk factor, but we also must be mindful of the impact of other chronic illnesses on our overall well-being."

The study had limitations

As with any study, there were some limitations with this one, Gary noted. 

One is the study period itself; it was done between 2010 and 2019. 

"It does not paint the full picture of the impact of COVID-19 lockdowns on comorbidities and cancer risk factors," the doctor said. 

"Additionally, as the study notes, the utilization of body mass index (BMI) as a screening tool for chronic disease such as obesity, which is linked to cancer risk, has been called into question," she told Fox News Digital.

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"It’s an important consideration as we look to reevaluate the ways in which we measure these comorbidities for more accurate reporting," she added.

In the future, parallel studies that look at patterns of other chronic illnesses in young people, including the impact of sedentary lifestyles and diet, are needed, said Gary.

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"While knowledge is power, we need to act on the data and on this knowledge so that ‘wellness’ is no longer just a buzzword or a mindset, and that the actions to achieve wellness are clearly defined, personalized, accessible and integrated into all that we do."

Fox News Digital reached out to the study authors for comment.