How Profitable are the Indian Companies
In one of my recent postings, I mentioned that the stock returns observed for the small-cap stocks has been quite high (175%). The median FII stake and the median FI stake in these firms is zero and their dividend yield is 0. Not many may be convinced that these are hopeless stocks (not all of them, but on an average) just because the dividend yield is 0. May be these companies have a lot of growth opportunities and hence they do not pay dividends. So zero dividend-yield in itself does not tell us anything about the stock or the company.
I did a further analysis of the profitability of these companies. I found that the median ROE of the large-cap stocks decreased from 15.28% to 10.47% over the last one year (I did not include 2006 data because Prowess database does not have the annual figures for most of these companies). The median ROE of the mid-cap companies decreased from 4.7% to 0.86%.
The median ROE of the small-cap companies increased from -34% to -1% over the same time period. (If we ignore the outliers, then the profitability improves from -3% to 8%) That is, the small-cap companies have been able to reduce their loss over this time period.
The dividend yield is zero because they are loss-making companies, not because they are investing money in profitable projects. However, this improement in profitability could be one of the reasons why the stock return was 175% for the small-cap companies.
If we put data for all the companies together, we will find that the profitability of the Indian companies has actaully come down in the last one year. The total profit, of course has increased in the given time period. However, what matters from stock valuation point of view is not the total profit but profitability, and it has gone down for the large-cap and the mid-cap companies.
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I did a further analysis of the profitability of these companies. I found that the median ROE of the large-cap stocks decreased from 15.28% to 10.47% over the last one year (I did not include 2006 data because Prowess database does not have the annual figures for most of these companies). The median ROE of the mid-cap companies decreased from 4.7% to 0.86%.
The median ROE of the small-cap companies increased from -34% to -1% over the same time period. (If we ignore the outliers, then the profitability improves from -3% to 8%) That is, the small-cap companies have been able to reduce their loss over this time period.
The dividend yield is zero because they are loss-making companies, not because they are investing money in profitable projects. However, this improement in profitability could be one of the reasons why the stock return was 175% for the small-cap companies.
If we put data for all the companies together, we will find that the profitability of the Indian companies has actaully come down in the last one year. The total profit, of course has increased in the given time period. However, what matters from stock valuation point of view is not the total profit but profitability, and it has gone down for the large-cap and the mid-cap companies.
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posted by Pitabas Mohanty at 5:32 AM
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