Showing posts with label Return. Show all posts
Showing posts with label Return. Show all posts

13/10/12

Increasing RoCE: a best senario


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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