08 Apr “Small Cap Investing: Watch for fundamentals- High ROE and Consistent Return on Capital Employed “
“Small Stocks, Big Potential: Uncovering 3 Companies with Strong Fundamentals”
Investing in small-cap stocks can be really challenging. , but if you make the right decisions, the rewards can be great.
There are two big challenges with investing in small caps.
The first is that when the stock market starts to go down, small caps often go down faster than other stocks.
The second is that when the market starts to go back up, big companies usually do better at first.
This can make people who invested in small caps feel like they’re missing out. However, by using some financial tricks and tools, you could find some small-cap stocks that might do well early on. If the market starts to go down, it’s a good idea to keep an eye on these stocks so you don’t miss out when things turn around.
To find good small-cap companies to invest in, a bunch of different financial ratios is considered. One important filter is the return on equity(ROE), which measures how much profit a company makes compared to the money invested in it.
Another important ratio is called return on capital employed (ROCE). This measures how efficiently a company uses its capital to generate profits. A higher ratio is generally better, one should also look at how consistent the ratio was over the past 5 years.
So, here is a list of the stocks to watch with a ROCE of over 15% in every year and an ROE of over 10% every year for the past 5 years with an operating profit margin (OPM) of at least 10%. OPM This is how much profit a company makes compared to its total revenue.
-Apcotex Industries Limited is a leading manufacturer of synthetic rubber and emulsion polymers in India.
-The company was established in 1980 and is headquartered in Mumbai, Maharashtra.
-Apcotex operates 3 manufacturing facilities in India, located in Maharashtra and Gujarat, and has a sales and distribution network in over 50 countries.
-The company’s products are used in a variety of industries, including textiles, paper, coatings, and adhesives.
• Financials: Apcotex Industries has shown consistent growth in its revenues over the past five years, with a revenue CAGR of 20%. The company’s operating margin has also improved over the years and is currently at around 16%. However, the company’s net profit margin has been inconsistent and fluctuated between 3.7% and 7.1% in the last five years.
• Debt: The company has managed to reduce its debt over the past few years, and its debt-to-equity ratio stood at 0.31 in FY 2021-22.
• Valuation: Apcotex Industries is currently trading at a P/E ratio of around 23.5, which is equal to the industry average. However, the company’s PEG Ratio of 0.62, indicates that the stock may be undervalued.
• Growth Prospects: Apcotex Industries has a diversified product portfolio and a presence in multiple geographies. The company is focused on expanding its product portfolio and increasing its market share in India and other countries. Additionally, Apcotex is investing in research and development to develop new products and improve existing ones.
• Raw Material Prices: The prices of raw materials used in the manufacturing of Apcotex’s products, such as styrene, butadiene, and acrylonitrile, are subject to fluctuations in global markets, which can affect the company’s profitability.
• Dependence on Key Customers: Apcotex is dependent on a few key customers for a significant portion of its revenue, and any loss of business from these customers could have a negative impact on the company’s financials.
• Regulatory Risks: The synthetic latex industry is subject to various regulations and environmental standards that may change from time to time, leading to increased compliance costs for Apcotex.
• Competitive Pressure: Apcotex faces intense competition from both domestic and international players in the synthetic latex market, which could impact its market share and profitability.
• Currency Fluctuations: Apcotex Industries operates in multiple geographies and is subject to currency fluctuations, which could impact the company’s revenues and profitability.
Overall, Apcotex Industries has shown consistent revenue growth over the past few years and has a competent management team. The company also has growth opportunities in both India and other countries. However, the company faces significant competition and is subject to input price fluctuations and currency risk.
-Wonderla Holidays Limited is one of the largest amusement park operators in India.
-The company was established in 2000 and is headquartered in Bengaluru, Karnataka.
-Wonderla operates three amusement parks in India, located in Bengaluru, Kochi, and Hyderabad, and offers a variety of rides, attractions, and entertainment options for visitors.
Financials: Wonderla Holidays has shown consistent revenue growth over the past five years, with a revenue CAGR of 7.6%. The company’s operating margin has also improved over the years and is currently at around 48.2%. Additionally, the company has a healthy net profit margin of around 27.8%.
Valuation: Wonderla Holidays is currently trading at a P/E ratio of around 19.2, which is lower than the industry average. The company’s P/B ratio of 2.7 is also lower than the industry average, indicating that the stock may be undervalued.
Management: Wonderla Holidays has a competent management team with experience in the hospitality and entertainment industry. The company’s board of directors comprises of six members, including three independent directors.
Growth Prospects: Wonderla Holidays has a strong brand name and a loyal customer base. The company is focused on expanding its presence in India by opening new amusement parks in high-potential areas. Additionally, Wonderla is investing in technology to enhance the visitor experience and increase operational efficiency.
Seasonality: Wonderla Holidays is heavily dependent on the tourism and leisure industry, which is subject to seasonality. The company’s revenues and profits are typically higher during the peak tourism season and lower during the off-season.
Competition: The amusement park industry is highly competitive, and Wonderla Holidays faces competition from both domestic and international players. The company’s ability to maintain and increase its market share could be impacted by competition.
Overall, Wonderla Holidays has shown consistent revenue growth and profitability over the past few years and has a competent management team. The company also has growth opportunities in India and is investing in technology to enhance its operations. However, the company is subject to seasonality, competition, and regulatory risks, which could impact its operations and financial performance.
-Established in 1994, Gateway Distriparks Ltd. has been providing integrated logistics solutions for over two decades.
-The company operates CFS and ICDs in India’s major ports, including Nhava Sheva (Mumbai), Chennai, and Krishnapatnam, among others.
-Gateway Distriparks Ltd. also offers value-added services such as customs clearance, bonded warehousing, and container repair.
-The company has an extensive client base, which includes both international and domestic players, across various industries such as pharmaceuticals, textiles, chemicals, and automobiles.
Financial Performance: The company’s financial performance has been steady over the years, with revenue and profits growing consistently. However, the company saw a slight dip in revenue in FY2021 due to the COVID-19 pandemic.
Valuation: The stock is currently trading at a price-to-earnings ratio (P/E) of 12.06, which is lower than the industry average of 25.79. The price-to-book ratio (P/B) is 1.94, which is also lower than the industry average of 2.96.
Debt: The company has a debt-to-equity ratio of 0.35, The interest coverage ratio is 2.89, which is also lower than the industry average of 3.84, indicating a healthy financial position.
Dividend: The company has been paying dividends consistently over the years, with a dividend yield of 3.11%.
Dependence on a Few Customers: The company’s business is highly dependent on a few large customers, which increases the risk of revenue concentration.
Competition: The company operates in a highly competitive industry, with other major players in the market including Adani Logistics, DP World, and APM Terminals.
Economic Factors: The company’s business is sensitive to economic factors such as GDP growth, inflation, and exchange rate fluctuations, which can impact its revenue and profitability.
Gateway Distriparks Ltd. has been consistently expanding its operations and has established a presence in new regions through acquisitions and partnerships. Despite its strong position in the market, the company faces several risks, including the possibility of a slowdown in the Indian economy, intense competition, and regulatory changes.
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