Stocks with Single-Digit P/E and High ROCE: A Potential Investment Opportunity?

Why Investors Find This Combination Attractive

When evaluating stocks, two key financial metrics often capture the attention of investors: high ROCE (Return on Capital Employed) and a single-digit P/E (Price-to-Earnings ratio). For the average investor, this combination can seem like an ideal opportunity. A high ROCE indicates that the company is efficiently utilizing its capital to generate profits, which is a strong sign of operational effectiveness. Meanwhile, a single-digit P/E suggests that the stock is undervalued, with investors paying relatively little for each rupee of earnings, potentially offering a bargain price for the company’s performance.

However, while this combination of metrics may appear appealing at first glance, it’s important to dig deeper before making any decisions. A low P/E ratio can sometimes be a red flag, signaling that investors may have concerns about the company's future growth potential or the overall health of its industry. These concerns could include operational challenges, market declines, or other risks not immediately reflected in the company's earnings. So, while high ROCE and a low P/E can indicate an attractive investment, understanding the underlying reasons for the stock’s low valuation is essential before jumping to conclusions.

Three companies with High ROCE and Single Digit P/E:

Coal India:

Coal India Ltd (CIL), a major coal producer, reported a 7.27 per cent decline in Q2 FY25 revenue to Rs 32,315.06 crore and a 21.86 per cent fall in net profit to Rs 6,289.10 crore year-on-year. The company also saw a significant 42.61 per cent drop in profit compared to the previous quarter. Despite these setbacks, CIL's stock delivered a 12.08 per cent year-to-date return and 30.51 per cent over the past year. It maintains a strong 64.92 per cent 3-year Return on Capital Employed (ROCE) and a low Price-to-Earnings (P/E) ratio of 7.18. This suggests that, despite short-term challenges, CIL remains an attractive investment.

Authum Investment & Infrastructure:

Authum Investment & Infrastructure Ltd, involved in fund-based activities like investing in securities and providing loans, saw a 48.12 per cent drop in revenue to Rs 1,116.83 crore in Q2 FY25, with a 21.28 per cent fall on a quarterly basis. Net profit also fell 56.55 per cent year-on-year to Rs 842.77 crore, down 23.15 per cent from the previous quarter. Despite these declines, the stock delivered a 93.68 per cent return both year-to-date and over the past year. The company boasts a solid 3-year Return on Capital Employed (ROCE) of 25.53 per cent. Its low Price-to-Earnings (P/E) ratio of 6.99 signals strong performance despite recent setbacks.

West Coast Paper Mills:

West Coast Paper Mills Ltd, one of India’s largest producers of paper for printing, writing, and packaging, reported a 14.6 per cent decline in revenue to Rs 1,002.30 crore in Q1 FY25, with an 11.19 per cent fall on a quarterly basis. Net profit also dropped by 53.63 per cent year-on-year to Rs 113.85 crore, with a 4.96 per cent decline from the previous quarter. The stock has delivered a negative return of -24.85 per cent year-to-date and -20.67 per cent over the past year. Despite these declines, the company maintains a strong 3-year Return on Capital Employed (ROCE) of 33.98 per cent. It also has a low Price-to-Earnings (P/E) ratio of 6.47, suggesting potential value despite recent setbacks.

Note: Not an Investment Recommendation – Do Your Due Diligence Before Investing