Appen Ltd (ASX: APX) is a popular ASX-listed company that provides and improves data for the development of artificial intelligence and machine learning products. With more than 20 years of experience in over 130 countries, Appen has firmly established itself as a global leader in this space.
There is an abundance of reasons to like this company but there are three that stand out to me and set it apart as a truly great company.
Return on Capital
Appen is not one of those companies that has grown and scaled while keeping debt low or non-existent — for context, I’ve covered companies like Codan Limited (ASX: CDA) or Altium Limited (ASX: ALU). Appen has a debt to equity ratio of 72.7%, but importantly, they know how to use their debt.
Appen has a return on capital (ROC) of 83.6% and a return on equity (ROE) of 21.2%. This shows that they are effectively implementing their capital to grow the business. It is not necessarily bad for a company to take on a lot of debt, as long as they use it effectively and can pay it back when it’s due. Appen’s interest cover ratio is substantial, so there shouldn’t be too much stress about whether they can service the debt.
Appen Keeps The Dividend Payout Ratio Low
Appen has a dividend payout ratio of 30%. Many investors look for dividend income when investing in shares, and they expect a high payout ratio. After all, as an owner of the company, those earnings belong to you, right?
However, a company shouldn’t always pay large dividends. If they have a product, innovation or improvement they can invest the money in, shareholders might be better off if the company holds onto the money. It’s likely that a company like Appen, with its high ROC and ROE, can make a better return with the retained profits than you could if you invested the money yourself. The benefits of re-investing profit flows through to investors with faster growth and a higher share price.
If they were unable to generate those impressive returns, investors might demand a higher dividend. But for now, I think it’s a good thing that Appen holds on to most of the earnings.
AI Is A Promising Thematic
Artificial intelligence is one of the more exciting areas of growth lately, and there’s a lot of potential for companies like Appen to make their mark and change the way consumers interact with technology. Covering solutions from e-commerce and fraud detection to social media analytics, Appen has a lot of room for growth.
A word of warning: many investors are excited about the potential of AI but they may be a little too excited. Before investing, always make sure you’re paying a reasonable price for a company.
A lot of companies in the AI sector are in danger of being overvalued due to momentum and investor sentiment, so always do your due diligence before investing.
Could These 2 ASX Tech Shares Be The Next Appen?
[ls_content_block id=”14947″ para=”paragraphs”]
Disclaimer: At the time of writing, Max does not own shares in Appen.
