Best Small Cap Stocks With High ROE To Add To Your Watchlist

Best Small Cap Stocks With High ROE: In the dynamic world of investing, small-cap stocks have long been the hidden gems that catch the eye of investors. These are lesser-known companies that offer significant growth potential. But, at the same time, these stocks come with huge risks.

One of the ways to judge the potential of these stocks is by seeing how much return these stocks have given to their shareholders. In this article, we will be covering 5 Best Small Cap Stocks With High ROE.

What is ROE?

ROE, or Return on Equity, is a metric that demonstrates the profitability and efficiency of a company. It is calculated by dividing the net income of a company by its shareholder equity. ROE is a useful tool for investors who want to gauge the financial health of a company and make informed investment decisions.

Formula,

ROE= Net income / Shareholders’ equity

The income statement can be utilized for deriving net income, which is the profit earned by the company before paying the dividend to its shareholders. 

The shareholders’ equity can be found on the balance sheet and is the difference between a company’s assets and liabilities. 

A higher ROE indicates higher earnings on equity and more efficient management of the business. To assess a company’s performance using ROE, it is better to compare its ROE to the industry average as well as similar companies within the same industry.

Best Small Cap Stocks With High ROE

For our study, we selected 5 stocks from various industries based on high ROE. Without any further delay, let us look at the 5 Best Small Cap Stocks With High ROE.

Triveni Engineering & Industries

Triveni Engineering & Industries Ltd is a focused and steadily growing company with expertise in two main areas: sugar production and engineering solutions.

The company’s operations are divided into two main segments: Sugar & allied businesses, which involve making sugar and distilling alcohol, and the Engineering business, which includes manufacturing high-speed gears, and gearboxes, and offering water/wastewater treatment solutions.

In the sugar industry, it’s one of the top three manufacturers in India and a market leader in the engineering sector, specializing in products like steam turbines, high-speed gears, gearboxes, and water treatment solutions.

Additionally, they run retail stores in rural and semi-urban areas through their subsidiary, Triveni Retail Ventures Ltd, and trade various fast-moving consumer goods, including sugar.

The company financials show that the company increased its revenue from ₹3,151.74 crores in FY19 to ₹5,616.83 crores in FY23. During the same period, its profits have increased from ₹196.05 Crores to ₹1,791.81 Crores.

Note: The net profit reported during FY23 includes proceeds from exceptional items. During the fiscal year, the Company sold the entirety of its 1.85% equity share in an Associate Company, Triveni Turbine Limited, resulting in an exceptional income of ₹1,401.20 crore (net of costs) in the consolidated financial statements.

This gives the company a CAGR growth of 15.54% and 73.87% on its net revenue and net profit respectively.

Coming to the return ratios, its ROE and RoCE stood at 78.33% and 57.35% respectively, which suggests high returns on the shareholder’s capital and optimum utilization of company resources.

The debt-to-equity ratio of 0.34 suggests that the company has low debt and primarily uses its own funds to run its operations.

The average ROE for the last 5 years suggests that the company has given an average return of 21.39% to its shareholders.

ESAB India

Incorporated in 1987, ESAB India Ltd is one of the leading suppliers of welding and cutting equipment in the country. It offers products and solutions for virtually every fabrication, welding and cutting process and application.

The company has 26 manufacturing plants situated that located in Europe, North America, South America, Asia/Pacific, and India. Currently, it supplies its products to more than 147 countries around the world

The company serves various industries including Shipbuilding, Aerospace, Automotive, Pipelines, Repair and maintenance, Power Generation, Process Industry, Transport and mobile Machinery and more.

If we look at the financials of the company, we can see that the net revenue of the company has increased from ₹671.63 crores in FY19 to ₹1,104.38 crores in FY23. This gives the company a sales CAGR growth of 13.24% during the period.

Similarly, its profits have increased from ₹57.59 crores in FY19 to ₹135.68 crores in FY23 giving it a CAGR growth of 23.89% during the period.

The ROE and RoCE stood at 53.79% and 72.47% respectively, which suggests good returns to shareholders’ capital and efficiency in the utilization of company resources. Furthermore, the company is debt-free and primarily uses its own funds to run its operations.

The average ROE for the last 5 years suggests that the company has given an average return of 29.73% to its shareholders.

Share India Securities

Established in 1994, Share India Securities is one of India’s leading financial service companies. It offers a wide range of services including stock broking, commodity derivatives broking, equity derivatives broking, currency derivatives broking, research analysis, portfolio management, and mutual fund distribution.

The company has been mainly catering to the HNI segment, however, aims for its retail segment to cater to the new-age investors. Over the years, the company has established a strong presence through a network of 729 branches spread across 16 states in India.

Furthermore, the company Trading Member of Cash, F&O and Currency Derivatives Segments of BSE Ltd, NSE Ltd; and Commodity Derivatives Exchange, viz. MCX Ltd, NCDEX and ICEX.

According to the company’s financials, net revenue has increased fivefold from ₹195.23 crores in FY19 to ₹1,088.23 crores in FY23. Similarly, its profits have increased 13 times from ₹24.99 crores to ₹330.67 crores during the last five years. 

This gives the company a CAGR growth of 53.65% and 90.72% on its net revenue and net profit respectively.

The ROE of 53.05% and RoCE are 53.88% imply a high return on capital invested by the shareholders and a highly optimum use of the company resources.

The debt-to-equity ratio of 0.24 suggests that the company has a low amount of debt in its balance sheet.

The 5-year ROE of 33.81% indicates that the company has consistently generated a high average return on the capital invested by its shareholders over the past five years.

Knowledge Marine & Engineering Works

Incorporated in 2015, Knowledge Marine & Engineering Works is a marine engineering services company. 

The company offers marine engineering services such as dredging at multiple ports in India, repair and refit services for naval and commerce ships, hydrographic and magnetometer surveys, and technical solutions for vessel maintenance and operations.

The Company has expanded from a small ship-repair unit to a ship-owning Company and has become an established player in the small-craft market segment in India. The company currently owns a diverse fleet of marine craft worth more than Rs.30 crores. 

Well-known ace investor, Ashish Khacholia holds 3,00,000 shares of Knowledge Marine & Engineering Works Ltd. As of October 18, 2023, the mentioned stake holds a value of 43.7 crores, representing approximately 2.3% of the company.

Over the past five years, the company has reported exceptional improvements in its financial statements. The net revenue of the company has increased 20 times from ₹10.57 crores in FY19 to ₹201.53 crores in FY23. This gives it a CAGR growth of 108.96% on its revenue.

Similarly, the net profit of the company has increased from ₹2.71 crores to ₹47.2 crores during the same duration. This gives it a CAGR growth of 104.29% on its net profits.

Coming to the return ratios, the company reported a ROE and RoCE of 52.05% and 56.67%, respectively. This suggests a good return to the shareholder’s capital and an optimum use of the company resources. 

Furthermore, the debt-to-equity ratio stood at 0.18 suggesting a low debt on the company’s balance sheet.

The company has consistently generated a high average return on the capital invested by its shareholders over the past five years, with a 5-year ROE of 51.79%.

Fine Organic Industries

Fine Organic Industries, founded in 1970, is a pioneer and the largest producer of oleochemical-based additives in India, as well as a prominent producer globally. 

The Company produces a wide range of specialty plant-derived oleochemicals-based additives used in foods, plastic, polymers, cosmetics, personal care, paint, ink, coatings feed nutrition and other specialty applications in various industries.

It has manufacturing facilities in Ambernath, Badlapur, and Dombivali, where it creates over 450 unique additives. Today, Fine Organics’ products are well-liked and used by customers in more than 80 countries worldwide.

The company financials show that the company increased its revenue from ₹1,060.33 crores in FY19 to ₹3,023.08 crores in FY23. During the same period, its profits have increased from ₹139.61 Crores to ₹618.1 Crores.

This gives the company a CAGR growth of 29.94% and 45.06% on its net revenue and net profit respectively.

The company’s ROE and RoCE are 49.44% and 65.39%, respectively, suggesting a good return to shareholders’ capital and the company resources being utilised to its full efficiency. 

The debt-to-equity ratio is 0.02, indicating that the company has negligible debt on its balance sheet.

The average ROE for the last 5 years suggests that the company has given an average return of 27.29% to its shareholders.

List of Best Small Cap Stocks With High ROE

Above we learnt about the best small Cap stocks with high ROE. The table below puts together the names covered above along with a few others.

Conclusion

As we conclude our article on ‘Best Small Cap Stocks With High ROE’, we can say that ROE can be used as a parameter for assessing a company’s potential. However, it’s not advisable to invest in small-cap stocks solely based on the return on equity. Instead, it’s important to evaluate a stock based on multiple criteria as these stocks are risky investments.

Written by Aaron Vas

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