Most readers already know that the stock of Larsen & Toubro Infotech (NSE: LTI) has risen significantly by 42% in the past three months. Given that the market rewards strong long-term financials, we wonder if this is the case in this case. More precisely, we decided to study the ROE of Larsen & Toubro Infotech in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
Discover our latest analysis for Larsen & Toubro Infotech
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Larsen & Toubro Infotech is:
27% = ₹ 21b ÷ ₹ 78b (based on the last twelve months up to September 2021).
“Return” refers to a company’s profits over the past year. Another way to look at this is that for every 1 value of equity, the company was able to make 0.27 profit.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
A side-by-side comparison of Larsen & Toubro Infotech’s 27% profit growth and ROE
For starters, Larsen & Toubro Infotech has a fairly high ROE which is interesting. Additionally, the company’s ROE is 14% higher than the industry average, which is quite remarkable. It is probably because of this that Larsen & Toubro Infotech has been able to achieve decent net income growth of 16% over the past five years.
Then, comparing with the industry net income growth, we found that the growth of Larsen & Toubro Infotech is quite high compared to the industry average growth of 12% during the same period, this which is great to see.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Larsen & Toubro Infotech is trading high P / E or low P / E, relative to its industry.
Does Larsen & Toubro Infotech use its retained earnings efficiently?
Larsen & Toubro Infotech has a three-year median payout rate of 33%, which means it keeps the remaining 67% of its profits. This suggests that its dividend is well hedged, and given the decent growth the company is seeing, it looks like management is reinvesting its earnings in an efficient manner.
In addition, Larsen & Toubro Infotech paid dividends over a period of five years. This shows that the company is committed to sharing the profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 34%. As a result, forecasts suggest that the future ROE of Larsen & Toubro Infotech will be 27%, which is again similar to the current ROE.
Overall, we think Larsen & Toubro Infotech’s performance is pretty good. In particular, it is great to see that the company is investing heavily in its business and with a high rate of return, which has resulted in significant growth in its profits. The latest forecasts from industry analysts show the company is expected to maintain its current growth rate. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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 to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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