How strong Fundamental ratios like ROE, ROA and ROCE stocks provided great returns
Updated on 6 Dec 2016
Market veterans always advise you to invest in stocks on the basis of performance ratios such as return on equity (RoE), return on assets (RoA) and return on capital employed (RoCE).
How to use these Ratio’s
For the layman, RoA of a company can help analyse the percentage return on assets. It reflects the amount of profit after tax generated in comparison with the total assets deployed. It is essentially a tool to interpret whether a company has been utilising its assets efficiently or not.
A higher RoA could mean that the company is handsomely utilising its assets.
The RoE shows the upper limit of the cost of capital of the equity holders as the company aims to maximise return to shareholders.
RoCE measures returns generated on the total risk assumed by the stakeholders. It measures earnings before interest and tax earned on equity and debt. Debt providers have residual claims on assets before equity holders.
Among the listed companies on BSE, 48 of the 50 stocks that saw simultaneous rise in RoA, RoE and RoCE over the past three year have ended up giving mindboggling returns going up to 2,200 per cent during this period.
Stocks like Mangalam Drug & Organics, Emmbi Industries, NGL Fine-Chem and Menon Bearings showed simultaneous rise in performance ratios over three years and their shares soared 2,191 per cent, 1,047.69 per cent, 1,043.11 per cent and 1,031.86 per cent, respectively, between December 31, 2013 and November 21, 2016.
The following is the list:-
Market experts said a synchronised rise in RoA, RoCE and RoE signals that the company is utilising its assets well by optimally deploying its equity fund and exploiting its credibility.
Looking at just the PE is not the right way of judging stock valuation. Along with PE, one should look at growth, return on capital employed (ROCE), free cash flow and the peer group. Investing in stocks by simply looking at a low PE can leave one with low-growth or low RoCE stocks, which may not deliver great returns. Except for Vedanta (down 2.38 per cent) and Religare Enterprises (18 per cent), the other stocks mentioned met the same criteria and gave handsome returns to investors during the period mentioned.
In the financial space, VLS Finance (up 263 per cent), Apple Finance (up 187 per cent), Elixir Capital (149 per cent), Bajaj Holdings & Investment (up 107.21 per cent) and Vardhman Holdings (up 267.65 per cent) also saw simultaneous rise in performance ratios in the previous three years and delivered good stock returns.
In the tyre space, JK Tyre (up 222 per cent) and Apollo Tyres (70 per cent) fulfilled the criteria. The Great Eastern Shipping Company was the only stock in the shipping space which fulfilled the criteria and surged nearly 12 per cent in last three years.