The 10-year history of return on equity of actively traded listed stocks shows a diminishing trend
06-Nov-2019 •Jugal Harpalani
Every company should aim at having a good return on equity, which is net income divided by shareholders' equity. But if we look at the current ROE of actively traded listed companies above Rs 100 crore (1,326 companies), only 38 per cent of the companies have a return on equity of 15 per cent or more. This means that if we assume the cost of capital to be 13 per cent, only 38 per cent of the actively traded listed companies in India are able to earn a return on shareholders' equity of 2 per cent more than the assumed cost of capital.
We also looked at the 10-year trend of the 1,326 actively traded companies. We have noticed a declining trend not only in the number of companies surpassing the 15 per cent threshold but also in the number of companies having ROEs above 20 and 25 per cent (see the chart 'Time erosion'). What is even more worrying is the decline in the number of companies surpassing the 25 per cent threshold. In a span of 10 years, there was a decline of 56 per cent in the number of companies earning a return on equity more than 25 per cent.
The graph 'Median ROE across various periods' shows how the median ROE of actively traded listed companies has been across various time spans. The period between 2010 and 2014 saw the median ROE peak. The period from 2015 to 2019 saw it bottom. However, fortunately, it has been rising for the last three years.