scorecardresearchLooking for stocks to buy? Here are 5 stocks with high Return on Equity
Return on Equity is a two-part ratio in its derivation because it brings together the income statement and the balance sheet.
Return on Equity is a two-part ratio in its derivation because it brings together the income statement and the balance sheet.

Looking for stocks to buy? Here are 5 stocks with high Return on Equity

Updated: 16 Mar 2022, 01:16 PM IST
TL;DR.

The ROE as a single measure is generally more useful in analyzing companies

Equity has historically outperformed all other asset classes in terms of return on investment. As a result, equities are a profitable asset type to invest in.

Equity investments, on the other hand, are more difficult to understand than traditional FDs, especially when it comes to estimating the return on investment.

When it comes to traditional FDs, you can determine the return on investment before you invest. This is because banks make the fixed annual interest rate on the investment very clear.

The same does not hold true for equity investments. When investing in equities, return on investment is the sum of the dividend received and the capital appreciation.

Dividends are paid out of a company's profits. As a result, every company that pays dividends should regularly make a profit and generate a healthy return on investment.

What is Return on equity?

Return on Equity (ROE) is the measure of a company’s annual return (net income) divided by the value of its total shareholders’ equity, expressed as a percentage.

Return on Equity is a two-part ratio in its derivation because it brings together the income statement and the balance sheet, where net income or profit is compared to the shareholders’ equity.

The number represents the total return on equity capital and shows the firm’s ability to turn equity investments into profits.

Why ROE is Important?

The ROE as a single measure is generally more useful in analyzing companies that are typically debt-free. It is because having excessive debt on the balance sheet can inflate the ROE.

A good rule of thumb is to target an ROE that is equal to or just above the average for the company's sector—those in the same business.

Relatively high or low ROE ratios will vary significantly from one industry group or sector to another.

How to use RoE to make better stock selection

Importantly, here you need to understand that RoE- the parameter can be used to pick stocks within the same sector only.

This is because there can be a huge gap in net income or profits across sectors. Also, within a sector, the RoE levels may be different.

Another important point that cannot be overlooked and needs to be mentioned is that RoE is even more important than return on investment as it tells shareholders how efficiently their capital is being reinvested for generating returns. In a usual case, the higher the return on equity better or the more is the company's capacity to generate cash.

So, a higher return on equity points to a better standing of the company with respect to its capacity to yield returns for its shareholders.

Here is the list of companies with high ROEs in the Indian Stock market.

TCS

TCS is a multinational information technology (IT) services company based out of India. It is the largest IT company worldwide and the second-largest Indian company in terms of market capitalization.

The IT giant has a total of 50 subsidiaries through which it services its clients across 146 countries.

As of 2018, it is ranked eleventh on the Fortune India 500 list. In April 2018, TCS became the first Indian IT company to reach $100 billion in market capitalisation

TCS earned an average revenue of US$45,300 per employee in the financial year 2021. Although the amount is not the highest in the industry, a higher headcount compensates for low revenue per employee. This seems like a strategic move as it helps the company to acquire more projects by quoting lower bills to its clients.

The attrition rate is the number of people leaving the company with respect to the total number of employees a company has. TCS reported an attrition rate of 7.2% compared to its peers which struggle to maintain a sub 15% number. TCS has the lowest attrition rate in the industry and beats its peers by a large margin.

TCS peers include: Infosys, Wipro, HCL

The stock has been an enormous wealth generator, surging 188% in the last five years.

In the last 5 years stock generated a return of 188%
In the last 5 years stock generated a return of 188%

On a yearly basis, from 2017 to 2021, the company has a return on equity of 30.49%, 30.33%, 35.18%, 38.44%, and 37.52%, respectively.

Company delivered 5-year average ROE of 34.36%.

Stock generated a 76.18% return as compared to Nifty IT which gave investors 131.74% return over 3 year time period.

Nestle

Nestle S.A. is a Swiss multinational food and drink processing conglomerate corporation headquartered in Vevey, Vaud, Switzerland.

It is the largest food company in the world, measured by revenue and other metrics, since 2014. It ranked No. 64 on the Fortune Global 500 in 2017 and No. 33 in the 2016 edition of the Forbes Global 2000 list of largest public companies.

Nestlé was formed in 1905 by the merger of the "Anglo-Swiss Milk Company", established in 1866 by brothers George and Charles Page.

Nestle's products include baby food (some including human milk oligosaccharides), medical food, bottled water, breakfast cereals, coffee and tea, confectionery, dairy products, ice cream, frozen food, pet foods, and snacks.

Nestle peers include: HUL, Dabur, Britannia, Godrej.

Nestle generated a ROE of 102.89% in the year ending 31 dec 2021
Nestle generated a ROE of 102.89% in the year ending 31 dec 2021

The company has been able to deliver exceptional results over the few years. Company delivered ROE of 102.89% in the year ending 31 Dec 2021 outperforming its 5-year avg. of 68.83%

On a yearly basis, from 2017 to 2021, the company has a return on equity of 32.83%, 36.56%, 45.3%, 70.39%, and 102.89%, respectively. Superior market share along with strong brand recognition gives Nestle the edge over its peers.

It announced a dividend of 65.0 per share on 17 Feb 2022..

Castrol India

Castrol India Limited is an automotive and industrial lubricant manufacturing company. Castrol India is the 2nd largest manufacturer of automotive and industrial lubricants in the Indian lubricant market and owns around 20% market share in the overall Indian lubricant market. It is part of Castrol Limited UK (part of BP Group)

Company had no debt since last 5 years and the Company's annual revenue growth of 38.63% outperformed its 3-year CAGR of 2.04%.

Castrol India has maintained an average ROE of 55.27 in the last five years.
Castrol India has maintained an average ROE of 55.27 in the last five years.

 

The ROE for this midcap-cap company from 2017 to 2021 has been 67.81%, 60.76%, 60.52%, 41.21%, and 46.06% respectively.

Castrol India has maintained an average ROE of 55.27 in the last five years. The company’s focus on strategic interventions along with optimizing the costs drove efficiencies and cash performance.

Colgate Palmolive India

Colgate Palmolive India is an Indian subsidiary of American consumer goods company Colgate Palmolive. It is engaged in oral care with products ranging from toothpaste, toothbrushes, mouthwashes. It also offers personal care products under the “Palmolive” brand.

It is the leading name in India in the oral care segment, and the products offered by the company in the oral care segment include toothpaste, toothbrushes, tooth powder, mouthwash and whitening products

Stock generated a 19.3% return as compared to Nifty FMCG which gave investors an 18.82% return over 3 year time period.
Stock generated a 19.3% return as compared to Nifty FMCG which gave investors an 18.82% return over 3 year time period.

The company also manufactures personal care products such as liquid hand wash, body wash, skincare, hair care and shaving products.

The company is known for adapting quickly to changes in customer behaviour and constantly innovates so as to offer the best products to its customers.

The Indian toothpaste market is valued at US$ 1.5 bn and is expected to grow at a CAGR of 6% over the next few years. Colgate reigns over the toothpaste market with a leading market share of 46.2%.

To maintain its leadership position and compete with its competitors, Colgate has launched a range of ayurvedic products in the fiscal year 2021.

The ROE for this large-cap company from 2017 to 2021 has been 45.33%, 44.16%, 53.60%, 51.21%, and 88% respectively. The five-year average ROE sums up to be 56.46%.

Stock generated a 19.3% return as compared to Nifty FMCG which gave investors an 18.82% return over 3 year time period. (as of last trading session).

Laurus Labs

Laurus Labs is an Indian pharma and biotech company headquartered in Hyderabad. Its focus areas include active pharma ingredients, finished dosage forms, synthesis and biotechnology.

Laurus Labs manufacturing units have received one or more approvals from USFDA, WHO, NIP Hungary, KFDA, MHRA, TGA, and PMDA.

The company operates through its subsidiaries in Europe and United States and also offers its services in contract research, clinical research and analytical research through its R&D centres.

In March 2020, Laurus Labs received US Food and Drug Administration approval to market hydroxychloroquine tablets. The company announced that it would supply hydroxychloroquine for clinical trials of preventive treatment of COVID-19.

Company delivered an ROE of 31.23% in the year ending 31 Mar 2021
Company delivered an ROE of 31.23% in the year ending 31 Mar 2021

Company delivered an ROE of 31.23% in the year ending 31 Mar 2021 outperforming its 5-year avg. of 19.32%.

Year on Year, the ROE of this company from 2017 to 2021 has been 20.78%, 15.83%, 8.83%, 23.93%, and 18.36% respectively.

The stock gave a 3-year return of 635.42% as compared to Nifty 100 which gave a return of 47.27%. (as of last trading session)

The company's annual revenue growth of 70.46% outperformed its 3-year CAGR of 32.02%.

 

Note: This story is for informational purposes only. Please seek advise of a financial advisor. 

Picking the right stocks is the most important part of becoming a successful investor
Picking the right stocks is the most important part of becoming a successful investor
First Published: 16 Mar 2022, 01:16 PM IST