IntraSoft Technologies Limited's (NSE:ISFT) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

IntraSoft Technologies (NSE:ISFT) has had a great run on the share market with its stock up by a significant 24% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study IntraSoft Technologies' ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for IntraSoft Technologies

How Is ROE Calculated?

Return on equity 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 IntraSoft Technologies is:

4.7% = ₹84m ÷ ₹1.8b (Based on the trailing twelve months to March 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 ₹0.05.

Why Is ROE Important For 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.

IntraSoft Technologies' Earnings Growth And 4.7% ROE

It is quite clear that IntraSoft Technologies' ROE is rather low. Even when compared to the industry average of 6.7%, the ROE figure is pretty disappointing. However, the moderate 8.9% net income growth seen by IntraSoft Technologies over the past five years is definitely a positive. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Given that the industry shrunk its earnings at a rate of 6.6% in the same period, the net income growth of the company is quite impressive.

Earnings growth is a huge factor in stock valuation. 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 IntraSoft Technologies fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is IntraSoft Technologies Using Its Retained Earnings Effectively?

IntraSoft Technologies' three-year median payout ratio to shareholders is 18% (implying that it retains 82% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, IntraSoft Technologies is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

On the whole, we do feel that IntraSoft Technologies has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 5 risks we have identified for IntraSoft Technologies by visiting our risks dashboard for free on our platform here.

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.