RoE of BSE 500 companies at 16-year low

Return on equity (RoE), a key strategic metric used to evaluate the capital allocation efficiency of a company, is at a 16 year low for the S&P BSE 500 companies, a research report said.

An improving RoE and earnings growth are considered to be best for market cap creation but RoE for BSE 500 companies has been edging lower ever since the global financial crisis of 2008-09 and stands at 9.5 per cent in FY19, lowest in the last 16 years.

“RoE of BSE500 moved up from 16.8 per cent in FY03 to a high of 22.9 per cent in FY07 but trended down after the financial crisis of 2008 due to a slew of macro and microeconomic factors,” a Motilal Oswal report said.

However, the report said that RoEs of corporate India - excluding public sector banks (PSBs), Telecom and Autos - have shown signs of improvement from FY15.

“Our analysis highlighted that the change in RoE has a material impact on market cap creation. Companies with improving RoE have significantly outperformed (CAGR of 7 per cent to 17 per cent) those with declining RoE over the three tested periods,” it said.

On the basis of its study, the brokerage firm listed its top stock picks as: Axis Bank, Bharti Airtel, Hindustan Unilever, Infosys and Ultratech Cement, in the large cap segment, and Federal Bank, JSW Energy, Tata Global, Trent and Voltas in the mid-cap segment.

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders’ equity. Because shareholders’ equity is equal to a company’s assets minus its debt, ROE could be thought of as the return on net assets.

Agencies