4 stocks that delivered over 30% returns on equity & capital in the past 3 years
Ajanta Pharma, Bajaj Corp, Hero Motocorp and TCS were the exceptional performers.
Krishna Karwa & Ritesh PresswalaMoneycontrol Research
Four blue-chip companies consistently delivered over 30 percent return on capital employed (ROCE) and return on equity (ROE) on an annual basis in every single one of the last three years.
The four stocks, comprising Ajanta Pharma, Bajaj Corp, Hero Motocorp and TCS, unlike their peers in the BSE universe, reported strong metrices on the ROCE and ROE front. While their robust business models and steadily progressive operating profitability played a role, their sound and efficient capital structure management/deployment policies also contributed to healthy returns.
In this study, our focus is on two important fundamental parameters – ROCE and ROE - which ought to be considered by investors before taking an investment decision.
While ROCE indicates the efficiency with which the company’s capital is put to use, ROE is a measure of the amount earned by equity shareholders relative to their proportion in a company’s overall capital (consisting of equity share capital and reserves).
More often than not, though both indicators are positively correlated, ROCE is a comparatively better tool to evaluate an entity’s long-term prospects since it takes debt financing into consideration as well.
To illustrate the point further, in FY17, for every Rs 100 invested by Ajanta Pharma in its capital (through equity and debt), a return of Rs 39.9 was earned. Similarly, in the same fiscal, equity shareholders of the company earned Rs 32.3 for every Rs 100 of their share in the company’s overall capital.
As seen in the table, though a minimum upside of 10 percent was earned during the three-year period by all stocks, it is pertinent to note that a company’s good track record, solely based on historical numbers, may not necessarily be the best way to determine how things would pan out in future, as upsides/downsides in stock prices can move in tandem with various other factors in addition to fundamentals. Secondly, stock prices incorporate the impact of the numbers reported by a company in the earlier years, even more so if it’s a good performer.Therefore, investors are advised to keep a watch on companies with a promising potential in the upcoming years, not just from the viewpoint of their expected ROCE and ROE, but also in reference to other valuation, operational, working capital, cash flow, and profitability measures.