Infosys Limited (NSE:INFY) Stock’s Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

With its stock down 8.2% over the past week, it is easy to disregard Infosys (NSE:INFY). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Infosys’ ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

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How Do You Calculate Return On Equity?

ROE 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 Infosys is:

35% = US$3.2b ÷ US$9.3b (Based on the trailing twelve months to December 2025).

The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every ₹1 worth of equity, the company was able to earn ₹0.35 in profit.

Check out our latest analysis for Infosys

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the 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, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Infosys’ Earnings Growth And 35% ROE

First thing first, we like that Infosys has an impressive ROE. Secondly, even when compared to the industry average of 15% the company’s ROE is quite impressive. Yet, Infosys has posted measly growth of 4.1% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn’t been able to do so. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

We then compared Infosys’ net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 25% in the same 5-year period, which is a bit concerning.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Infosys”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Infosys Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 60% (or a retention ratio of 40%), most of Infosys’ profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Moreover, Infosys has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 72%. As a result, Infosys’ ROE is not expected to change by much either, which we inferred from the analyst estimate of 32% for future ROE.

Conclusion

On the whole, we do feel that Infosys has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren’t reaping the benefits of the high rate of return. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page 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.