For investors, Return On Equity (ROE) is a useful financial ratio to check while hunting for quality stocks. It’s a fairly simple calculation - ROE is net profits divided by shareholder equity.
This ratio gives investors a good sense of the stock’s profitability - how efficient the company is at converting equity provided by shareholders into profit. An ROE below 10% is considered weak.
ROE however, is a ratio that varies greatly by sector, since some businesses, like say commodities, may build more assets than cash flows. This screener therefore, is a useful way to look at ROE, by identifying ROE outperformers at a sector level.
Nestle India has among the highest outperformance over its sector in annual ROE. The company has outperformed the FMCG sector by 70 percentage points in annual ROE. Nestle posted an annual net profit growth of 3% YoY and witnessed a rise of 23 bps YoY in annual EBITDA margin.
Next in the list is CG Power and Industries with an annual ROE of 90.9%, outperforming the general industrials sector by 64.4 percentage points. The company’s annual EBITDA margin rose by 5.3 percentage point YoY, helping ROE expand.
Info Edge (India) has the next highest annual ROE in its sector and outperforms the software & services sector by 42.1 percentage points. A growth in annual net profit of almost 9X YoY in FY22 with a 10 percentage point YoY rise in annual EBITDA margin aided the company to achieve a high annual ROE of 74%.
Page Industries outperforms the textiles, apparels & accessories sector by 23.5 percentage points in terms of annual ROE. The company achieved this high ROE as its annual net profit for FY22 grew 57.5% YoY with its annual EBITDA margin growing 150 bps YoY.
