5 Smallcap Stocks with Highest Return on Assets

To gauge the profitability of a business, you can use several parameters, one of which is Return on Assets (RoA).

This ratio measures the profitability of a business in relation to its assets. It is calculated by dividing the net profit by the net assets of a company. The higher the ratio, the better.

But why is RoA important?

RoA tells how much earnings a business generates from its assets. A higher RoA indicates that the company is using its assets efficiently.

Also, if the ratio is consistently improving over time, it means the company is able to generate higher profits with smaller investments.

Now that you know why RoA is an important metric, let's look at 5 smallcap stocks that have the highest RoA.

We have shortlisted these stocks using the Equitymaster India stocks screener.

#1 Tips Industries

First on the list is Tips Industries.

The company produces and distributes motion pictures and also acquires music rights. It has a collection of over 30 thousand songs across various genres and languages.

Tips also co-produced over 40 Hindi films and sold theatrical and satellite rights to distributors and broadcasters. The company has a wide distribution network serving over 1,000 wholesalers and 400 thousand retailers.

It has signed deals with various companies, including YouTube, Maddock Films, Dharma Production, Viacom 18, Netflix, TATA Sky, Excel Entertainment, Hotstar, and Spotify, for premiering its movies and songs.

The company's RoA for the financial year 2023 is 31.8% and its trailing twelve-month RoA is 45.05%. This is much higher than its peers in the media and entertainment industry. This indicates that the company is using its assets more efficiently to generate profits than its peers.

In the last five years, the RoA averaged 21.9%. Check out how the company is performing on all important return ratios.

Financial Snapshot of Tips Industries (2019-23)

	FY19	FY20	FY21	FY22	FY23
Return on assets (%)	5.1%	11.9%	25.8%	34.9%	31.8%
Return on equity (%)	4.0%	14.1%	42.9%	63.0%	56.2%
Return on capital employed (%)	13.0%	17.8%	58.5%	86.6%	77.8%

Source: Equitymaster

Coming to its financial performance, the revenue has grown at a compound annual growth rate (CAGR) of 26.3% in the last three years. This is on the back of new song releases and high streaming revenues. The net profit also grew by a CAGR of 20.7%.

In the financial year 2023, the company released over 800 songs and repaid its entire debt to become a debt-free company for the first time in nine years.

The company has invested over Rs 1.5 billion (bn) in creating new content and aims to become one of the top three music companies in India by creating, acquiring, and delivering quality music to its audience.

Going forward, the company's growing investment in the music field will drive its revenue and profits in the medium term.

To know more, check our Tips Industries financial factsheet and latest quarterly results.

#2 Gujarat Themis Biosyn

Second on the list is Gujarat Themis Biosyn.

The company manufactures and sells pharmaceutical and medical chemicals. It also produces finished active pharmaceutical ingredients (API) through the fermentation process.

The company is the first to start commercial production of Rifampicin, a drug that is used to treat tuberculosis.

It also produces Rifamycin S and Rifamycin O, antibiotics used to treat tuberculosis, mycobacterium avium complex, leprosy, legionnaires' disease, and irritable bowel syndrome.

At present, the company serves the domestic market and expects to export its products to Europe and the US in the next few years.

Gujarat Themis Biosyn has one manufacturing unit with an installed capacity of 16,000 kg per month. It plans to expand it further by adding additional capacity.

At the end of the financial year 2023, the company's RoA was 34.9%, whereas its peers averaged 11.16%. The company's five-year average is also ahead of its peers at 30.7%.

Financial Snapshot of Gujarat Themis Biosyn (2019-23)

	FY19	FY20	FY21	FY22	FY23
Return on assets (%)	20.0%	34.6%	31.7%	32.4%	34.9%
Return on equity (%)	34.6%	56.1%	43.1%	42.2%	38.9%
Return on capital employed (%)	45.1%	70.9%	59.9%	57.9%	52.1%

Source: Equitymaster

The revenue of the company has grown at a CAGR of 11.1% on account of growth in volume in the last three years. Its net profit also grew at a CAGR of 22.5%.

The return on equity (RoE) and return on capital employed (RoCE) are 38.9% and 52.1%, respectively.

Gujarat Themis Biosyn has big expansion plans. It's currently building a research and development (R&D) unit with a capital of Rs 320 million (m) to develop new products.

The company is also setting up a warehouse, wastewater treatment system, and solvent yard in India with a capex of Rs 2 bn. Despite investing heavily in capex, the company is debt free.

Given the success of its past investments, the new investments are also expected to reap good profits for the company.

To know more, check out Gujarat Themis Biosyn's financial factsheet and latest quarterly results.

#3 Maithan Alloys

Next on the list is Maithan Alloys, India's largest manganese alloy producer.

The company is engaged in manufacturing and exporting ferromanganese, silico manganese, and ferrosilicon, all three bulk ferroalloys.

It also generates and supplies wind power for commercial and captive use.

The company has a diversified customer base spread across 35 countries and long-term associations with most of its clients, including Tata Steel, SAIL, and Hyundai Steel.

Maithan Alloys has three manufacturing plants with a total capacity of 235 thousand tonnes per annum and accounts for 7% of the installed capacity in India.

Its RoA at the end of the financial year stood at 14%, with a five-year average of 17.7%, whereas the industry average stood at 9.4%.

This shows that the company is using its assets efficiently.

Financial Snapshot of Maithan Alloys (2019-23)

	FY19	FY20	FY21	FY22	FY23
Return on assets (%)	17.3%	15.0%	12.3%	29.9%	14.0%
Return on equity (%)	22.9%	17.2%	15.1%	35.2%	23.4%
Return on capital employed (%)	30.0%	22.1%	19.9%	46.7%	28.8%

Source: Equitymaster

In the last three years, the company's revenue has grown at a CAGR of 16.8%. The net profit has grown at a CAGR of 54.5% on account of high orders and high realisations.

The company plans to incur a capex of Rs 2.5 bn in the next two years to set up a greenfield project in West Bengal under one of its subsidiaries to enhance its capacity across products by 38%.

Maithan Alloys is debt free company and plans to remain the same. It's funding this capex through internal accruals. This indicates the strong cash flow position of the company.

Going forward, its established market position, high repeat orders, and capacity expansion are expected to drive the company's revenue and net profit in the medium term.

To know more, check out Maithan Alloys' financial factsheet and latest quarterly results.

#4 Diamines and Chemicals

Fourth on the list are Diamines and Chemicals.

Incorporated in 1976, the company is the key producer of ethylene amines in India.

It caters to a large section of the manufacturing industry, covering bulk drugs, fungicides, textile auxiliaries, paints and adhesives, water treatment chemicals, lube oil additives, and polyamide resins.

The company has one manufacturing plant in Gujarat where it manufactures derivatives of ethylene amines.

At the end of the financial year 2023, its RoA was 27.8%, with a five-year average of 17.3%. In contrast, the company's peers had an average of 16.5% which shows the company's competitiveness in terms of efficiency and performance.

Financial Snapshot of Diamines and Chemicals (2019-23)

	FY19	FY20	FY21	FY22	FY23
Return on assets (%)	21.3%	0.0%	22.2%	15.2%	27.8%
Return on equity (%)	26.9%	0.0%	24.7%	16.7%	31.2%
Return on capital employed (%)	36.7%	0.0%	30.5%	22.1%	42.0%

Source: Equitymaster

In the last three years, the company's revenue and net profit have grown at a CAGR of 20.1% and 25.9%, respectively, on account of the established market position of the company.

The company's RoE and RoCE have also continuously improved and currently stand at 31.2% and 42%, respectively.

Recently, the company commissioned its pilot plant with R&D facilities, which will help expand it innovate and develop new products.

The project cost around Rs 145 m, which was entirely funded through internal accruals, which helped Diamines and Chemicals retain its debt-free status. It also set up a trading division which will help improve its volumes and fetch better margins.

Going forward, the company's established market position and capacity expansion will drive its revenue and net profit in the medium term.

To know more, check out Diamines and Chemicals' financial factsheet and latest quarterly results.

#5 Swaraj Engines

Last on the list is Swaraj Engines.

The company manufactures diesel engines and components, especially for tractors. It supplies diesel engines in the range of 20 horsepower (HP) to 65 HP.

In the last 32 years, the company supplied over 1.45 m engines for 'Swaraj' tractors. It primarily supplies engines to Mahindra and Mahindra (M&M), which is also one of the primary stakeholders in the company.

The company has one manufacturing plant with a capacity to produce 180,000 units per annum. Earlier, the company's capacity was 150,000 units per annum. However, it was increased to 180 thousand units per annum in light of growing demand.

Swaraj Engines' RoA currently stands at 25%, with a five-year average of 22.2%. The industry's average stood at 12.6%, indicating the operational efficiency of the company.

Financial Snapshot of Swaraj Engines (2019-23)

	FY19	FY20	FY21	FY22	FY23
Return on assets (%)	22.5%	20.0%	20.2%	23.7%	25.0%
Return on equity (%)	34.7%	30.2%	33.1%	35.8%	39.1%
Return on capital employed (%)	53.7%	39.6%	44.5%	48.1%	52.6%

Source: Equitymaster

The company also reported outstanding financials and has a revenue growth and profit growth of 13% (CAGR) in the last three years.

The RoE and RoCE have also continuously improved and currently stand at 39.1% and 52.6%, respectively.

Currently, the company is planning to expand its manufacturing capacity again from 180,000 units to 195,000 units per annum on account of the growing demand for engines.

The entire project would be funded through internal accruals and surplus of the company, which will keep the company's debt unchanged at zero.

With growing crop output, a hike in minimum support prices, and a good monsoon, the demand for tractors is expected to go up, which will help the company grow its revenue and profits in the medium term.

To know more, check out Swaraj Engines' financial factsheet and latest quarterly results.

Snapshot of top smallcap stocks with high Return on Assets on Equitymaster's Indian stock screener

Here's a quick view of the above companies based on their financials.

Please note that these parameters can be changed according to your selection criteria.

This will help you identify and eliminate stocks not meeting your requirements and emphasise those stocks well inside the metrics.

A word of caution, the above-mentioned smallcap companies have high RoA indicating efficiency in generating returns from assets. However, one cannot just rely on one indicator to gauge a company.

There are several indicators, such as revenue and profit growth, debt, return ratios such as RoE and RoCE, market conditions, and future prospects.

It's important that you do your due diligence before investing in any company.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...