Will Weakness in L&T Technology Services Limited's (NSE:LTTS) Stock Prove Temporary Given Strong Fundamentals?

L&T Technology Services (NSE:LTTS) has had a rough three months with its share price down 4.7%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on L&T Technology Services' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for L&T Technology Services is:

21% = ₹13b ÷ ₹61b (Based on the trailing twelve months to June 2025).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.21 in profit.

Check out our latest analysis for L&T Technology Services

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.

L&T Technology Services' Earnings Growth And 21% ROE

To start with, L&T Technology Services' ROE looks acceptable. Especially when compared to the industry average of 9.0% the company's ROE looks pretty impressive. This probably laid the ground for L&T Technology Services' moderate 14% net income growth seen over the past five years.

As a next step, we compared L&T Technology 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 25% in the same period.

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. Is L&T Technology Services fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is L&T Technology Services Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 40% (implying that the company retains 60% of its profits), it seems that L&T Technology Services is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Moreover, L&T Technology Services is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 38% of its profits over the next three years. As a result, L&T Technology Services' ROE is not expected to change by much either, which we inferred from the analyst estimate of 23% for future ROE.

Conclusion

On the whole, we feel that L&T Technology Services' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.