As investors with a long-term investment horizon, it becomes crucial to understand company fundamentals. Doing so ensures a good return when it comes to your investment. There tend to be many parameters one may use to assess the firm. One key measure is called return on Equity, or simply ROE. It is always favorable from an investor’s point of view to choose stocks that provide them with a high ROE.
Investors can plan their financial goals by checking the ROE. In this article, we will discuss the factors that go into choosing stocks with high RoE and what to consider when doing so, especially in relation to Indian markets.
What is Return on Equity (ROE?
Return on Equity is a ratio that indicates the financial performance of a company. It is calculated technically by dividing the net income by the shareholder equity of the company. The result is expressed as a percentage. This can be used to measure a company’s overall efficiency and ability to generate profit.
This ratio can indicate a firm’s ability to convert its investments into capital gains. It takes into consideration factors like the net income on the income statement and the shareholder equity on the balance sheet. It is a good sign if the return on Equity increases consistently from year to year. This reflects the ability of management to reinvest the earnings from their businesses in order to increase the value to shareholders.
The ROE is a financial ratio and indicator that has meaning when compared with other firms. The reason for this is that market conditions and industry standards can vary. Benchmarking can be done using the industry ROE. Investors can use ROE in conjunction with other financial ratios to help make decisions.
Top 4 Indian companies with a high ROE
Stock market companies are classified into three categories based on market capitalization: large, mid-cap, and small-cap. We have selected a few ROE high-performing stocks from India in each of these segments.
Companies with a capitalization exceeding Rs20 billion are considered large companies. Below are two large-cap companies that investors might want to consider.
Nestle India, the Indian branch of Nestle, is a Swiss-based company. It is a major player in the food industry, with products such as Milo, Kit Kat, and Milkmaid, to name a couple. The firm is free of debt. Over the last few years, its financial growth has consistently exceeded all expectations.
Nestle India’s ROE for a year is 104.53%, and its ROE over five years is 72.51%. The company has a high return on Equity and is able to provide its shareholders with a great deal for their money. Nestle has a competitive advantage with its superior returns on the market and brand recognition, which makes it a stock that offers a high return on Equity.
This stock reflects what the legendary investor Warren Buffet said: “Price is not what you pay, but what you receive”!
Did you Know?
Nescafe was a relatively young brand before World War II. During this period, it grew in fame and became a staple beverage for the US Military.Procter & Gamble
Procter & Gamble Hygiene and Health Care is a multinational firm with its headquarters in the US. It is a leading producer of fast-moving products. The company’s products are primarily geared towards the personal care and hygiene industry. Pampers, Gillette, and Old Spice are just a few of the products that the company offers.
The company has a ROE of 71.64 % for the past year and an average of 52.26 % over five years. Its consistent growth can be attributed to its focus on consumer-centric innovation and robust advertising. This makes it a top choice for investors seeking a high ROE in India.
Mid Caps With a High ROE
Mid-cap companies are those with a capitalization between Rs5,000 crores and Rs20,000 crores. They tend to be riskier investments compared with large-cap stocks, but they have a lower profile of risk compared with small-cap stocks.
Castrol India Limited
Castrol India Ltd is primarily focused on the production and distribution of industrial lubricants. The company is the second largest in its field, with a roughly 20% market share. The company is free of debt. It is thus a share with both a high ROE in India and low debt.
Castrol India’s ROE for the last five years was 58.94%. This is a very positive result for its shareholders. A greater focus on the optimization of costs and cash utilization achieved this. It also invested in the latest technology to launch several brands.
Small caps with a high ROE
This classification is for firms with a m-cap of less than Rs5,000 crore.
TAAL ENTERTAINMENTS is a niche technology and engineering solutions company that’s worth watching. It is the partner of choice when it comes to air charter solutions. The ROE of 72.81% is impressive compared to its competitors. The company focuses on custom-made solutions for product engineering.
The Bottom Line
It is crucial to invest capital in India wisely, as the business landscape is constantly changing. Some tools and methods can be used to generate long-term profits consistently. ROE can be used along with other factors in order to make efficient investment decisions.
This article aims to identify investment decisions that ROE may influence as a key parameter and their benefits. This metric helps to understand the fundamentals of a company. It should, however, be combined with other information, such as industry ROE and P/E ratios or the amount of debt taken on. Enjoy your investing!
Disclaimer: Finology does not recommend the stock(s) mentioned above. They are chosen to help you understand the concept of biology.