Oracle Financial Services Software Limited (NSE:OFSS) On An Uptrend: Could Fundamentals Be Driving The Stock?

Most readers would already know that Oracle Financial Services Software's (NSE:OFSS) stock increased by 7.8% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Oracle Financial Services Software'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.

See our latest analysis for Oracle Financial Services Software

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 Oracle Financial Services Software is:

35% = ₹25b ÷ ₹71b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.35 in profit.

What Is The Relationship Between ROE And 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. 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.

Oracle Financial Services Software's Earnings Growth And 35% 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 probably laid the groundwork for Oracle Financial Services Software's moderate 8.9% net income growth seen over the past five years.

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 24% over the last few years, which is not something we like to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. Is Oracle Financial Services Software fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Oracle Financial Services Software Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 91% (or a retention ratio of 9.0%) 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.

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. 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. Accordingly, forecasts suggest that Oracle Financial Services Software's future ROE will be 35% which is again, similar to the current ROE.

Conclusion

In total, it does look like Oracle Financial Services Software has some positive aspects to its business. As noted earlier, its earnings growth has been quite decent, and the high ROE does contribute to that growth. Still, the company invests little to almost none of its profits. This could potentially reduce the odds that the company continues to see the same level of growth in the future. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.