Companies that have consistently increased their return on capital employed over the last five years
13-May-2021 •Danish Khanna
Financial ratios are a useful tool to analyse companies as they compress financial details in ready-to-use chunks. To assess a company's profitability, return on equity (ROE) is frequently used. This ratio measures how much profit a company has been able to generate on its shareholders' funds, also called equity. However, ROE doesn't capture the full picture. A company often raises debt for its operations and ROE doesn't tell you what returns it has made on the debt portion. This makes return on capital employed (ROCE) a better metric as it takes into account both equity and debt.
Here we bring to you companies which have been able to increase their ROCE consistently over the last five years. What does this imply? It means that these companies have not just constantly achieved superior returns over the previous year, but they have also put in extra efforts to be able to grow their profits. This also speaks tonnes about their prudent capital allocation and efficiency.
Profits alone are not enough. They should also be backed by consistent cash flows. The companies mentioned here have also been able to deliver positive cash flows from operations during all the years.
Of course, you shouldn't invest in these companies only on the basis of their ROCE. Do analyse them thoroughly before taking an investment call.