Is eClerx Services Limited's (NSE:ECLERX) Recent Stock Performance Tethered To Its Strong Fundamentals?

eClerx Services (NSE:ECLERX) has had a great run on the share market with its stock up by a significant 21% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on eClerx Services' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How To Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for eClerx Services is:

25% = ₹5.7b ÷ ₹23b (Based on the trailing twelve months to June 2025).

The 'return' refers to a company's earnings over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.25 in profit.

Check out our latest analysis for eClerx Services

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of eClerx Services' Earnings Growth And 25% ROE

At first glance, eClerx Services seems to have a decent ROE. Especially when compared to the industry average of 9.2% the company's ROE looks pretty impressive. This certainly adds some context to eClerx Services' decent 16% net income growth seen over the past five years.

As a next step, we compared eClerx Services' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 27% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about eClerx Services''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is eClerx Services Making Efficient Use Of Its Profits?

eClerx Services' three-year median payout ratio to shareholders is 0.9% (implying that it retains 99% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, eClerx Services has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 40% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

Overall, we are quite pleased with eClerx Services' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.