Cognizant Technology Solutions (NASDAQ:CTSH) has had a great run on the share market with its stock up by a significant 7.6% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Cognizant Technology Solutions’ ROE.
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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part – they are all under $10bn in marketcap – there is still time to get in early.
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 Cognizant Technology Solutions is:
14% = US$2.1b ÷ US$15b (Based on the trailing twelve months to September 2025).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.14 in profit.
See our latest analysis for Cognizant Technology Solutions
So far, we’ve learned that ROE is a measure of a company’s profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
At first glance, Cognizant Technology Solutions seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 11%. This certainly adds some context to Cognizant Technology Solutions’ decent 6.9% net income growth seen over the past five years.
We then performed a comparison between Cognizant Technology Solutions’ net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 7.4% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is CTSH worth today? The intrinsic value infographic in our free research report helps visualize whether CTSH is currently mispriced by the market.
With a three-year median payout ratio of 27% (implying that the company retains 73% of its profits), it seems that Cognizant Technology Solutions is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
Besides, Cognizant Technology Solutions has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 24% of its profits over the next three years. As a result, Cognizant Technology Solutions’ ROE is not expected to change by much either, which we inferred from the analyst estimate of 17% for future ROE.
In total, we are pretty happy with Cognizant Technology Solutions’ performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
link