HCL Technologies Limited's (NSE:HCLTECH) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

HCL Technologies (NSE:HCLTECH) has had a great run on the share market with its stock up by a significant 20% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on HCL Technologies' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. 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?

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 HCL Technologies is:

25% = US$2.0b ÷ US$8.2b (Based on the trailing twelve months to March 2025).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.25 in profit.

Check out our latest analysis for HCL Technologies

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 HCL Technologies' Earnings Growth And 25% ROE

At first glance, HCL Technologies seems to have a decent ROE. On comparing with the average industry ROE of 15% the company's ROE looks pretty remarkable. Probably as a result of this, HCL Technologies was able to see a decent growth of 5.5% over the last five years.

Next, on comparing with the industry net income growth, we found that HCL Technologies' reported growth was lower than the industry growth of 25% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is HCL Technologies fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is HCL Technologies Using Its Retained Earnings Effectively?

HCL Technologies has a significant three-year median payout ratio of 86%, meaning that it is left with only 14% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, HCL Technologies 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 89% of its profits over the next three years. Accordingly, forecasts suggest that HCL Technologies' future ROE will be 28% which is again, similar to the current ROE.

Conclusion

On the whole, we do feel that HCL Technologies has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.