XTGlobal Infotech Limited (NSE:XTGLOBAL) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

XTGlobal Infotech's (NSE:XTGLOBAL) stock is up by a considerable 12% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study XTGlobal Infotech'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 XTGlobal Infotech is:

5.2% = ₹99m ÷ ₹1.9b (Based on the trailing twelve months to March 2025).

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 ₹0.05.

Check out our latest analysis for XTGlobal Infotech

What Is The Relationship Between ROE And Earnings Growth?

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

XTGlobal Infotech's Earnings Growth And 5.2% ROE

It is quite clear that XTGlobal Infotech's ROE is rather low. Even compared to the average industry ROE of 15%, the company's ROE is quite dismal. Given the circumstances, the significant decline in net income by 4.1% seen by XTGlobal Infotech over the last five years is not surprising. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared XTGlobal Infotech's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 28% in the same period. This is quite worrisome.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is XTGlobal Infotech fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is XTGlobal Infotech Making Efficient Use Of Its Profits?

XTGlobal Infotech doesn't pay any regular dividends, meaning that potentially all of its profits are being reinvested in the business, which doesn't explain why the company's earnings have shrunk if it is retaining all of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Conclusion

On the whole, we feel that the performance shown by XTGlobal Infotech can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 2 risks we have identified for XTGlobal Infotech visit our risks dashboard for free.

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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.