Are Sify Technologies Limited's (NASDAQ:SIFY) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

Sify Technologies (NASDAQ:SIFY) has had a rough three months with its share price down 36%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Sify Technologies' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Sify Technologies

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Sify Technologies is:

8.0% = ₹874m ÷ ₹11b (Based on the trailing twelve months to December 2019).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.08.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Sify Technologies' Earnings Growth And 8.0% ROE

At first glance, Sify Technologies' ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 8.5%, we may spare it some thought. Particularly, the exceptional 24% net income growth seen by Sify Technologies over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Sify Technologies' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 20% in the same period.

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. Is Sify Technologies fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sify Technologies Efficiently Re-investing Its Profits?

The three-year median payout ratio for Sify Technologies is 28%, which is moderately low. The company is retaining the remaining 72%. By the looks of it, the dividend is well covered and Sify Technologies is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Sify Technologies has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 28%. Accordingly, forecasts suggest that Sify Technologies' future ROE will be 7.6% which is again, similar to the current ROE.

Summary

In total, it does look like Sify Technologies has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.