Are Oracle Financial Services Software Limited's (NSE:OFSS) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

With its stock down 38% over the past three months, it is easy to disregard Oracle Financial Services Software (NSE:OFSS). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Oracle Financial Services Software's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

How Do You 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 Oracle Financial Services Software is:

30% = ₹23b ÷ ₹77b (Based on the trailing twelve months to December 2024).

The 'return' is the profit over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.30.

View our latest analysis for Oracle Financial Services Software

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Oracle Financial Services Software's Earnings Growth And 30% ROE

To begin with, Oracle Financial Services Software has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 12% also doesn't go unnoticed by us. Probably as a result of this, Oracle Financial Services Software was able to see a decent net income growth of 8.6% over the last five years.

We then compared Oracle Financial Services Software's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 23% in the same 5-year period, which is a bit concerning.

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. This then helps them determine if the stock is placed for a bright or bleak future. Is Oracle Financial Services Software fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Oracle Financial Services Software Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 91% (or a retention ratio of 9.2%) for Oracle Financial Services Software suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Oracle Financial Services Software has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 83%. As a result, Oracle Financial Services Software's ROE is not expected to change by much either, which we inferred from the analyst estimate of 35% for future ROE.

Conclusion

On the whole, we do feel that Oracle Financial Services Software has some positive attributes. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.