Investors looking for multibagger stocks often focus on financial metrics that indicate strong business performance. Two of the most critical metrics in stock analysis are Return on Equity (ROE) and Return on Capital Employed (ROCE). Using a stock price screener with these metrics can help identify high-quality stocks with the potential for exponential growth.

What is ROE and Why Does It Matter?

Return on Equity (ROE) measures a company’s profitability relative to shareholders’ equity. It shows how effectively a company is using its equity to generate profits.

Formula for ROE:

ROE=Net IncomeShareholders′ Equity×100ROE = \frac{Net \ Income}{Shareholders’ \ Equity} \times 100

Why ROE is Important for Multibagger Stocks:

• A high and consistently growing ROE indicates a company’s ability to generate strong profits.
• It reflects efficient capital utilization, which is a key trait of multibagger stocks.
• ROE above 15-20% over several years is a good indicator of wealth-creating businesses.

What is ROCE and Why Does It Matter?

Return on Capital Employed (ROCE) measures a company’s efficiency in generating returns from both equity and debt.

Formula for ROCE:

ROCE=EBITTotal Capital Employed×100ROCE = \frac{EBIT}{Total \ Capital \ Employed} \times 100

Why ROCE is Important for Multibagger Stocks:

• It shows how well a company is using all its capital, not just shareholder equity.
• A high ROCE (above 15%) suggests the company is generating strong returns on its investments.
• ROCE is particularly useful for capital-intensive industries like manufacturing and infrastructure.

How to Use ROE and ROCE in a Stock Price Screener

• Filter stocks with ROE and ROCE above 15-20% for at least 5 years.
• Compare ROE and ROCE together—a company with high ROE but low ROCE may have excessive debt.
• Look for rising trends in ROE and ROCE, indicating improving business efficiency.

Final Thoughts

High ROE and ROCE are essential indicators of potential multibagger stocks. Investors can use a stock price screener to find companies with strong financial performance and long-term growth potential. By focusing on businesses with efficient capital utilization, investors can increase their chances of identifying stocks that deliver exceptional returns.

Disclaimer: Stock investments carry risks. Always conduct thorough research or consult a financial advisor before making investment decisions.