EClerx Services Limited (NSE: ECLERX) stock has recently shown weakness, but the financial outlook looks correct: is the market wrong?

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eClerx Services (NSE: ECLERX) had a tough week with its stock price down 11%. But if you pay close attention to it, you might find that its key financial metrics look pretty decent, which could mean the stock could potentially rise in the long term given how markets typically reward long-term fundamentals. more resistant term. Specifically, we have decided to study the ROE of eClerx Services in this article.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

See our latest review for eClerx services

How to calculate return on equity?

The formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE of eClerx services is:

22% = ₹ 3.2b ÷ ₹ 15b (Based on the last twelve months up to June 2021).

The “return” is the profit of the last twelve months. This therefore means that for every 1 of its shareholder’s investments, the company generates a profit of 0.22.

What is the relationship between ROE and profit growth?

So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

A side-by-side comparison of eClerx Services profit growth and 22% ROE

For starters, eClerx Services’ ROE seems acceptable. Additionally, the company’s ROE compares quite favorably to the industry average of 13%. Needless to say, we are quite surprised to see that eClerx Services’ bottom line has declined 11% over the past five years. We believe there might be other factors at play here that are preventing the growth of the business. These include low profit retention or poor capital allocation.

That being said, we compared the performance of eClerx Services with the industry and became concerned when we found that although the company reduced its profits, the industry increased its profits at a rate of 12 % during the same period.

NSEI: ECLERX Past Profit Growth October 22, 2021

Profit growth is a huge factor in the valuation of stocks. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. Is eClerx Services just valued over other companies? These 3 evaluation measures could help you decide.

Is eClerx Services effectively reinvesting its profits?

EClerx Services’ low three-year median payout ratio of 1.7% (implying that it keeps the remaining 98% of its profits) comes as a surprise when you associate it with declining profits. The low payout should mean that the business keeps most of its profits and, therefore, should experience some growth. There could therefore be other explanations in this regard. For example, the business of the company can deteriorate.

In addition, eClerx Services has paid dividends over a period of at least ten years, which means that the management of the company is committed to paying dividends even if it means little or no growth in earnings. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to increase to 45% over the next three years. However, the company’s ROE is not expected to change much despite the expected higher payout ratio.

Conclusion

Overall, we believe eClerx services have positive attributes. However, given the high ROE and high profit retention, we would expect the company to show strong profit growth, but this is not the case here. This suggests that there could be an external threat to the business, hampering its growth. That said, we have studied the latest analysts’ forecast and found that while the company has cut profits in the past, analysts expect its profits to rise in the future. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.

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