For those looking at direct equities from a long-term perspective, it is advisable to identify companies that have maintained strong fundamentals over a period of time. The stock prices of such companies are generally resilient to economic shocks and have the ability to generate above average wealth in the medium to long term. Steady profitability, falling or zero debt levels and rising networth are some of the factors that can help in judging such companies. Profitability in terms of net earnings helps to derive return to the shareholders, whereas falling debt levels reduces the likelihood of insolvency. In addition, rising net worth implies that a company’s total assets are growing faster than its total liabilities, which indicates its financial health.
Consolidated data for adjusted EPS, net worth and debt to equity ratio for 700 companies with market cap greater than Rs 500 crore have been analyzed for the past 10 years, starting from 2009-10. Companies that have consistently reported positive adjusted EPS were filtered out. In addition, only those companies whose net worth was consistently rising in the past decade were included. To look at the solvency prospects, only those with zero or consistently falling debt to equity ratios were included.
Only 24 companies passed these filters comprehensively. In the last one, three, five and 10 years, the average returns of these companies was 16.3% (24 companies), 24% (22 companies), 99.5% (20 companies) and 720.5% (19 companies) respectively. The number of companies for which share price data was available in the respective time frames have been mentioned in the brackets. While, the BSE500 index delivered 7.1%, 22.2%, 43.1% and 126.2% returns in the past one, three, five and 10 years respectively. All returns are absolute and point to point.
The numbers show substantial outperformance with respect to the BSE500 index. In the last five and 10 years, the outperformance over the market was over 2.3 times and 5.7 times respectively.
To look at the future potential of such companies, only those covered by at least four Bloomberg analysts and with a one-year forward price potential greater than 10% have been considered. Let us look at five such companies:
- Voltamp Transformers
- Finolex Cables
Steady finances are good news
Consider companies with a one-year forward price potential of more than 10%
Read More News on
- Philip Hammond moves to tackle Brexit economic shock
- India likely to be less affected by global economic shocks:IMF
- RBI seems to have discounted economic shock if Opec hammers out an agreement
- Clear Sign of Economic Shocks Since Brexit Vote: George Osborne
- India's ability to absorb economic shocks is stronger: Arun Jaitley
- Global economic shocks may throw 16 mn people into poverty: UN
1 Comment on this Story
Jomy Nangani384 days ago
Could you share which were the remaining 19 companies from the list of 24 mentioned in the article?