Skip to main content

Check returns on capital before investing

Invest In Tax Saving Mutual Funds Online

Call 0 94 8300 8300 (India)

 

 


Thirty companies which generated an average RoCE of 30 per cent for five years have seen their market cap rise by 90 per cent

While it's no surprise the stock market is increasingly sifting between better quality companies and the alsorans, the extent of the rally's concentration in afew stocks suggests the market is becoming more choosy. While the stock market has surged 13 per cent year to day and also hit an all- time high recently, only six companies in the 30- stock BSE benchmark, the Sensex, are near their all- time highs. As many as 14 are a little more than 30 per cent away from these.

Experts say a key change in this rally is that investors are seeking out and investing in quality companies, with lower debt and higher returns. In the current environment quality companies are a big factor, those with better cash flows, debt management, and sustainable profits.

Try this measure

One key statistic which can greatly assist investors is the return on capital employed (RoCE). This ratio has a direct impact on the market capitalisation of companies. The higher the ratio, the better the chance that a stock will deliver higher returns in the longer run.

Companies which generated an average return on capital of 30 per cent annually in the past five years have increased their market capitalisations by 89 per cent. Those where the return hovered at 15- 30 per cent, on average, saw market capitalisations surge 38 per cent. Those with a return on capital between zero and 15 per cent saw a decline of 32 per cent. The high returns were generated by adding very little debt as compared to the others

A recent report by Ambit Capital on the BSE 200 stocks says ₹ 100 invested at the beginning of 2001- 02 in the top RoCE quintile (and rebalanced annually) becomes ₹ 421 by the end of FY13, based on median returns each year. On the other hand, ₹ 100 invested at the beginning of FY02 in the bottom RoCE quintile delivers only ₹ 87 by the end of FY13 (excluding dividends and buybacks). In other words, investors have lost in lower RoCE companies.

Many professional investors go by this measure. With a combination of lower invested capital and higher profitability, businesses reap significant advantages and shareholders significant returns. Superior capital efficiency and a decent growth of real earnings over a period of time will create outstanding value.

Why

In his book, Of long- term value and wealth creation from equity investing, this quality of businesses as paramount. This is what software firms enjoyed in the decade of the '90s and the early part of the last decade. These businesses were, in any case, outstanding free cash machines, enjoyed exceptional RoCE, had rising margins, along with increasing business volumes and improving pricing. Some of the top- notch software firms were generating outstanding RoCE (upwards of 60- 70 per cent), along with almost similar profit growth. This is what created a situation in which, in a brief period of four years, firms such as Infosys went up an incredible 140- 150 times. RoCE combines the best parts of the balance sheet and profit and loss accounts, two crucial elements in a company's accounts. If the balance sheet is not strong enough, with lower debt, it will reflect in lower return on the capital employed. If the profits are not adequate or there is no significant profitability, the return on capital will also be lower. Both cases are not ideal for investors to make stock investments.

And, both these parameters, lower debt and higher profits, reflect the quality of the management, say experts. A higher RoCE shows the management is of high quality and trying to achieve more efficiency through lesser amounts of capital.

These types of businesses do significantly well over time.

Another characteristic of many of these high return companies is ability to pay out better dividends to shareholders. Experts say a high RoCE might be tough for companies to sustain over very long periods if the net worth is expanding. This would result in lower returns. Hence, these companies also have to give out better shareholder returns through higher payouts from profits to investors.

Another statistic which can be used is to see how much new gross fixed assets a company is investing in, as compared to its cash generated from operations. For example, if total operating profits earned in the past five years is ₹ 1,000 crore, ideally it should incur new fixed asset costs that are lower than this amount. So, in the past five years, its total of fixed assets should not go up beyond, say, ₹ 800 crore. If it overshoots the cash generated, the company would have to borrow from the market; it also means it does not generate enough cash to pay back shareholders.

Take Page Industries, for example. This company's gross block increased by ₹ 115 crore in the past four years but its operating profits after paying interest on its loans added to ₹ 485 crore in this time. This leaves enough surplus for it to distribute with shareholders or expand its capacities further with internal accrual.

Little surprise the stock surged 56 per cent (compounded annual growth rate) in four years.

In some years, of course, capital assets could suddenly spike up if a company is taking up rapid expansion; so, cash flows in the first few years could take a hit. But as long as capital invested in the business is at reasonable levels and the cost of capital is kept lower, chances of generating a higher operating cash flow from a business get better. Correspondingly, the return to investors also increases.

Investors would do well to find out good high RoCE companies that are sustainable, combined with lower valuations. Companies that can sustain their returns on capital can be seen from the longer term borrowing history.

Experts say companies that come to the market for regular capital infusions are not able to keep their balance sheets leaner and efficient. In the initial periods, capital infusion might give a boost to their businesses and earnings growth.

What investors should look for is a combination of higher returns on capital employed, with higher earnings growth. This is the best potential combination for higher possible value creation

On the other hand, higher return on capital and lower earnings growth might maintain the business but won't help value creation. A lower return on capital and lower profitability might lead to value destruction |Experts say by using this measure, along with a lower price- earnings ratio, investors can greatly increase their chances of making winning stock market investments

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

------------------

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

Popular posts from this blog

SBI Magnum Tax Gain Scheme 1993 Applcation Form

    https://sites.google.com/site/mutualfundapplications/tax-saving-mutual-funds-elss     Investment Details Basics Min Investment (Rs) 500 Subsequent Investment (Rs) 500 Min Withdrawal (Rs) -- Min Balance -- Pricing Method Forward Purchase Cut-off Time (hrs) 15 Redemption Cut-off Time (hrs) 15 Redemption Time (days) -- Lock-in 1095 days Cheque Writing -- Systematic Investment Plan SIP Yes Initial Investment (Rs) -- Additional Investment (Rs) 500 No of Cheques 12 Note Monthly investment of Rs 1000 for 6 months and quarterly investment of Rs 1500 for 4 quarters.
Read more

Birla Sun Life Tax Plan Online

Invest Birla Sun Life Tax Plan Online   An Open-ended Equity Linked Savings Scheme (ELSS) with the objective to achieve long-term growth of capital along with income tax relief for investment.   After a bad patch from 2008 to 2010, Birla Sun Life Tax Plan has made a big comeback in the last five years, with a particularly good run since 2014. The fund's rankings, which had slipped to two stars in 2011-12, recovered sharply to three-four stars in the last three years. The fund has delivered a particularly large outperformance over its benchmark and peers in the last couple of years. The fund's investment strategy focuses on a diversified and high-quality portfolio, with parameters such as capital ratios and balance-sheet strength used to judge quality. It uses a combination of top-down and bottom-up approaches to take sector/stock positions. The fund avoids highly leveraged plays. Staying more or less fully invested at all times, the fund parks roughly half of its portfoli
Read more

Should you Roll Over 1 year Fixed Maturity Plans?

The period between January and March typically sees an uptick in the launch of fixed maturity plans, or FMPs. Not this year. Instead, fund houses are busy rolling over or extending the tenure of their one- year FMPs launched last year to three years. Investors in one- year FMPs have a choice. Either redeem units or roll over to three years. If you exit now, your gains will be added to your income and taxed in line with your individual slab rate of 10, 20 or 30 per cent. If you stay invested for two more years, you pay 20 per cent tax with indexation benefit. Yields have softened in the past few months on expectations of a rate cut. If the central bank continues its soft monetary stance, yields are likely to fall further. In such a scenario, it makes sense for investors, particularly those in the 30 per cent tax bracket, to roll over their investments and lock in at a higher yield now. In a surprise move, the Reserve Bank of India cut repo rate by 25 basis
Read more

Mutual Fund Review: IDFC Premier Equity Fund

  IDFC Premier Equity Fund, which falls under the presumed high risk group of mid- and small-cap schemes, can rely on astute and timely equity picks. These make it less vulnerable to fluctuations compared with others in the category   IDFC Premier Equity Fund is designed to invest in upcoming, but promising businesses available at cheap valuations, and hold on to these businesses until they reap desired returns. The experiment has been successful so far, and IDFC Premier Equity has emerged as one of the top performing mutual fund schemes in the mid- and smallcap category of equity schemes.    While the scheme is an open-ended equity fund, i.e. open for subscriptions throughout the year, it has a unique philosophy to limit fresh inflows. Thus, while an investor can always take the systematic investment plan ( SIP ) route to invest in the scheme throughout the year, inflows through a lumpsum investment have been restricted. Since inception, IDFC Premier Equity has been opened for l
Read more

IDFC Premier Equity Fund dividend

  IDFC Mutual Fund   has announced dividend under the dividend option of   IDFC Premier Equity Fund Direct-D . The quantum of dividend shall be   R 4.3464 per unit.   The record date has been fixed as May 06, 2015. Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara Robeco Equity Tax Saver 8. IDFC Tax Advantage (ELSS) Fund 9. Axis Tax Saver Fund 10. BNP Paribas Long Term Equity Fund You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds Invest in Tax Saver Mutual Funds Online - Invest Online Download Application Forms For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call --------------------------------------------- Leave your comment with mail ID and we will answer them OR You can write to us at PrajnaCapital [at] Gmail [dot]
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now