Declining Stock and Decent Financials: Is The Market Wrong About Oracle Financial Services Software Limited (NSE:OFSS)?

By
Simply Wall St
Published
November 23, 2021
NSEI:OFSS
Source: Shutterstock

Oracle Financial Services Software (NSE:OFSS) has had a rough three months with its share price down 10.0%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Oracle Financial Services Software's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Oracle Financial Services Software

How To 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% = ₹19b ÷ ₹61b (Based on the trailing twelve months to September 2021).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.30 in profit.

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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

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

First thing first, we like that Oracle Financial Services Software has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. This likely paved the way for the modest 9.5% net income growth seen by Oracle Financial Services Software over the past five years. growth

Next, on comparing with the industry net income growth, we found that Oracle Financial Services Software's reported growth was lower than the industry growth of 14% in the same period, which is not something we like to see.

past-earnings-growth
NSEI:OFSS Past Earnings Growth November 24th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 96% (or a retention ratio of 4.0%) 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.

Additionally, Oracle Financial Services Software has paid dividends over a period of seven 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 82% of its profits over the next three years. 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 33% for future ROE.

Summary

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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.