Not Defence PSU BEL Or HAL, But This Defence Stock Below Rs 110 Has Highest ROE, ROCE; Do You Own?

The outlook for defence stocks remains robust on the back of a strong order book and robust pipeline execution. Apart from this, the latest geopolitical tensions have made defence stocks attractive bets. But which defence stock has given the highest profitability to its investors? It's neither of the defence PSUs such as Bharat Electronics (BEL) nor Hindustan Aeronautics (HAL).

There are two profitability ratios Return On Equity (RoE) and Return On Capital Employed (ROCE). The two indicators are important and help in understanding which company is generating more returns for their shareholders.

ROE:

As per ICICI Direct's blog, Return on Equity (ROE) is the measure of how efficient a company is at generating profits. It can be described as the company's net profit relative to its total shareholder equity, or the amount of money made for every rupee invested by shareholders. ROE is expressed as a percentage. You can use ROE to determine a stock growth rate and its dividend growth rate as well.

The formula for calculating ROE: Net income / Equity of the shareholders.

As per ICICI Direct, generally, a higher ROE is seen positively, as it indicates the company is efficient at generating profits. The ROE of a company needs to be compared with the ROE of its peers. The ROE of companies in a particular sector can be different from that of another sector. The target ROE should be equal to or just above the average for the company's sector.

It further added that a constantly rising ROE over time can indicate that the company is efficiently generating value for its shareholders. It means that the company is effectively reinvesting its earnings which is resulting in increased profits.

ROCE:

Coming to ROCE, Motilal Oswal explains that it reflects a financial ratio used to evaluate a company's capital efficiency and profitability.

Motilal added that ROCE is one of many ratios to understand the profitability of any company and is effectively used by stakeholders, managers, and future investors while analysing any company for investment.

Formula for ROCE: EBIT / Capital Employed

As per Aditya Birla Capital, the higher the value of the ROCE ratio, the better the chances of profits. The investors must look for companies with higher ROCE value and compare it with the various other companies, before arriving at an investment decision.

Top 5 Defence PSU Stocks With Highest ROE and ROCE:

Currently, Avantel Ltd has the highest ROE and ROCE in the defence sector to the tune of 33.3% and 47.9%.

While the second highest ROE and ROCE is provided by Solar Industries at 31.1% and 38.7%.

At third, Hindustan Aeronautics (HAL) has an ROE of 24.7% and ROCE of 27.9%, while Mazagon Dock Shipbuilders follows at fourth with an ROE and ROCE of 22% and 29.7% respectively. Lastly, BEL at fifth has an ROE and ROCE of 21.2% and 28.4% respectively.

Avantel Share Price:

On May 13, at the time of writing, Avantel shares traded at Rs 102.95 apiece, down by 4.41%. The stock's 52-week high and low is at Rs 140 and Rs 32.23 apiece respectively. Despite the latest hiccups, Avantel shares are a multi-bagger with gains of a whopping 211% in a year, while its 5-year performance surged by 2,240.91%.

But Avantel's all-time gains are breathtaking by 18,964.81%. The stock price was at Rs 0.54 on January 25, 2001.

Avantel has been supporting the strategic sector for three decades and has rolled out many unique products/solutions to Indian Defence Services and allied establishments. The company in its initial years, has manufactured various building blocks of the Radios.