It's easy to ignore Cognizant Technology Solutions (NASDAQ:CTSH), as its stock price has declined 11% over the past three months. However, stock prices are usually driven by a company's financial health in the long run, and in this case it looks pretty respectable. In particular, I would like to pay attention to Cognizant Technology Solutions' ROE today.
Return on equity or ROE tests how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company's shareholders.
Check out our latest analysis for Cognizant Technology Solutions.
How is ROE calculated?
of ROE calculation formula teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, the ROE for Cognizant Technology Solutions is:
16% = USD 2.1 billion ÷ USD 13 billion (based on trailing 12 months to December 2023).
“Return” refers to a company's earnings over the past year. That means that for every $1 of shareholders' equity, the company generated $0.16 in profit.
Why is ROE important for profit growth?
So far, we have learned that ROE is a measure of a company's profitability. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company's earnings growth potential. Generally speaking, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Cognizant Technology Solutions' revenue growth and ROE of 16%
First, Cognizant Technology Solutions' ROE looks acceptable. His ROE for the company looks pretty good, especially when compared to the industry average of 12%. But for some reason, Cognizant Technology Solutions' average net income growth rate of 4.1% over just five years doesn't reflect that high profit. This is interesting, as high earnings should mean the company has the ability to generate high growth, but for some reason it's not. Reasons why this can happen include, for example, a company's high dividend payout ratio or a business's poor capital allocation.
We then compared Cognizant Technology Solutions's net income growth rate with its industry and found that the company's growth rate is lower than the industry average growth rate of 14% over the same five-year period, which is a bit concerning.
The foundations that give a company value have a lot to do with its revenue growth. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. This can help you decide whether to position the stock for a bright or bleak future. What is CTSH worth today? Our free research report's intrinsic value infographic helps you visualize whether CTSH is currently mispriced in the market.
Are Cognizant Technology Solutions reinvesting profits effectively?
Despite a typical three-year median payout ratio of 26% (and a retention rate of 74% over the past three years), Cognizant Technology Solutions' earnings have barely grown as we've seen above. Therefore, other factors may be at play. For example, your business may be facing some headwinds.
Furthermore, Cognizant Technology Solutions has been paying dividends for seven years, which is a significant period of time, and management must have realized that shareholders want dividends more than profit growth. We checked the latest analyst consensus data and found that the company is expected to continue paying out around 25% of its profit over the next three years. Therefore, the prediction is that his future ROE for Cognizant Technology Solutions will be 16%, which will also be similar to his current ROE.
summary
Overall, we feel that Cognizant Technology Solutions has some positive attributes. However, the low profit growth is a bit concerning, especially considering that the company has a high rate of return and reinvests a large portion of its profits. There may be other factors inhibiting growth that are not necessarily in control of your business at first glance. That said, the company's earnings are expected to accelerate, according to the latest industry analyst forecasts. Learn more about the company's future revenue growth forecasts here. free Create a report on analyst forecasts to learn more about 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 using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
