Tata Consultancy Providers Restricted’s (NSE:TCS) Inventory’s On An Uptrend: Are Sturdy Financials Guiding The Market?
Tata Consultancy Services (NSE: TCS) stock is up a whopping 16% in the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial metrics, as a company’s long-term financial health usually dictates market results. We’re going to be paying special attention to Tata Consultancy Services’ ROE today.
Return on Equity, or ROE, is an important metric for assessing how efficiently a company’s management is using the company’s capital. In short, ROE shows the profit each dollar generates on its equity investment.
Check out our latest analysis for Tata Consultancy Services
How do you calculate the return on equity?
The ROE can be calculated using the formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Tata Consultancy Services is:
38% = ₹ 345b ÷ ₹ 907b (based on the last twelve months ended June 2021).
The “return” is the income that the company has earned over the past year. One way to conceptualize this is that the company made a profit of ₹ 0.38 for every ₹ of shareholder equity.
What does ROE have to do with earnings growth?
So far we have learned that the ROE measures how efficiently a company generates its profits. We now need to evaluate how much profit the company is reinvesting or “keeping” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else stays the same, the higher the rate of growth of a company compared to companies that do not necessarily have these characteristics, the higher the ROE and retained earnings.
A side-by-side comparison of Tata Consultancy Services’ earnings growth and 38% ROE
First off, Tata Consultancy Services has a pretty high ROE, which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 12%, which is quite remarkable. This was likely the basis for Tata Consultancy Services’ modest net income growth of 6.4% over the past five years.
As a next step, we compared Tata Consultancy Services’ net income growth to that of the industry and were disappointed to find that the company’s growth was below the industry average of 11% over the same period.
NSEI: TCS Past Earnings Growth September 13, 2021
The basis for increasing the value of a company is largely linked to its earnings development. It is important for an investor to know if the market has factored in the company’s expected earnings growth (or decline). That way, they can determine whether the future of the stock looks promising or ominous. Is Tata Consultancy Services rated fairly compared to other companies? These 3 benchmarks can help you make a decision.
Is Tata Consultancy Services reinvesting its profits efficiently?
With a 3-year median payout ratio of 37% (meaning the company keeps 63% of its profits), Tata Consultancy Services appears to be reinvesting efficiently, seeing a respectable increase in its profits and paying a dividend that is well covered .
Additionally, Tata Consultancy Services has been paying dividends over a period of at least a decade, which means the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows the company’s future payout ratio is projected to climb to 66% over the next three years. However, it is expected that the company’s ROE will not change materially despite the higher expected payout ratio.
Overall, we think Tata Consultancy Services performed reasonably well. In particular, it’s great to see that the company has invested heavily in its business and this, along with a high return, has resulted in respectable earnings growth. With that in mind, the latest forecasts from industry analysts show that the company’s earnings are expected to accelerate. Are these analyst expectations based on broad industry expectations or company fundamentals? Click here to go to our analysts forecast page for the company.
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