Is Larsen & Toubro Infotech Limited's (NSE:LTI) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

By
Simply Wall St
Published
July 23, 2021
NSEI:LTI
Source: Shutterstock

Larsen & Toubro Infotech (NSE:LTI) has had a great run on the share market with its stock up by a significant 12% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Larsen & Toubro Infotech's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Larsen & Toubro Infotech

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 Larsen & Toubro Infotech is:

26% = ₹20b ÷ ₹78b (Based on the trailing twelve months to June 2021).

The 'return' is the yearly profit. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.26.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Larsen & Toubro Infotech's Earnings Growth And 26% ROE

To start with, Larsen & Toubro Infotech's ROE looks acceptable. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. This probably laid the ground for Larsen & Toubro Infotech's moderate 15% net income growth seen over the past five years.

We then compared Larsen & Toubro Infotech's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same period.

past-earnings-growth
NSEI:LTI Past Earnings Growth July 24th 2021

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Larsen & Toubro Infotech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Larsen & Toubro Infotech Using Its Retained Earnings Effectively?

Larsen & Toubro Infotech has a three-year median payout ratio of 32%, which implies that it retains the remaining 68% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Larsen & Toubro Infotech has paid dividends over a period of five 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 over the next three years is expected to be approximately 36%. Accordingly, forecasts suggest that Larsen & Toubro Infotech's future ROE will be 27% which is again, similar to the current ROE.

Summary

Overall, we are quite pleased with Larsen & Toubro Infotech's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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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