We
always look to Return on Assets and Return on Equity to gauge company’s
financial performance. Return on Capital Employed (RoCE) is a measure of how
gainfully a company is able to deploy or use its capital. A company which can
generate higher profits from a lower capital base will always be better off
compared to a firm which needs higher capital to generate the same level of
profit. Investors always prefer stocks which have low risk-reward ratio
similarly a company with higher RoCE will be preferred over a company with a
lower RoCE. This fact can see in most leading FMCG companies which have
consistently outperformed the market.
It
has been seen that the expansion of RoCE generally leads to the expansion of
price-to-earnings ratio (P/E). Thus, an investor benefits on two counts. One is
through increase in earnings and second is by expansion of P/E. On the other
hand an investor would avoid stocks to which have falling RoCE. Though RoCE
gives best measure of company’s profitability, one should not consider only RoCE
for stock selection criteria because many other factors affect company’s
profitability.
Rising
RoCE lead down by two possibilities; one is the company is reducing its capital
base by higher payout with same level of profits and second is the company’s
profit is increasing super normally with same level of capital. Both of the scenarios
will result in to increase in RoCE.
In reverse
case the companies’ price which has falling RoCE has crashed significantly. I
have also attached list of companies which has falling RoCE. Most of the
company’s price fell significantly during last three years.
Here
we have applied the same parameters, i.e. increasing RoCE since last 3 years,
on BSE 500. There are total 41 companies which have rising RoCE. Out of 41 we
have selected top 15 companies which reported highest RoCE expansion. We have
also calculated the return if we would have invested in these stocks before 3
years.
Top 15 Companies
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