[List of Profitable Businesses] When we search for the most profitable share, what we are actually looking for? We are searching for stocks of those companies that have a very profitable underlying business. How one can identify such shares?
Our search can be based on the following two approaches:
- First: It’s based on historical price appreciation. We can check the price trend. If the price growth is fast enough, the company can be assumed as profitable. For example, the market price of TCS has grown by 2.4 times in the last 5 years, hence is profitable. We are assuming that all stocks that have seen good price growth have a profitable business. But judging the profitability based only on price trends is like incomplete work.
- Second: It is based on a profitability analysis of the underlying business. This article will focus on identifying the most profitable share based on this approach. We’ll use the profitability ratios of companies and compare them with their respective industry benchmarks.
List of Most Profitable Shares
(Updated on 06-May-2023)
|SL||Name||Industry||MCap||ROE (Ind)||ROE||ROCE (Ind)||ROCE||OPM (Ind)||GMR Score|
|5||ISMTLTD:||Steel Tubes & Pipes||2267.9||12.5||84.0||17.3||68.0||8.5||80.0|
Profitable Business – The Concept
What is a profitable business? The answer must be simple, right? High-profit margin companies must be the choice. But this simplistic definition of profitability may not be accurate. In our search, we must also focus on the following:
- Industry Focus: If we’ll focus only on high-margin companies, we’ll miss out on other good companies. Why? Because all companies do not operate at high margins. The reason for their low margins could be the inherent characteristic of the industry within which they operate. Our target is to find the most profitable share within each industry.
- Degree of Profitability: Companies that display lower margins may sometime prove better than other high-margin companies. How? Because what matters more is the degree of profitability. For example, in an industry whose average profitability is 6%, a company operates at 15% levels. It is better than a 20% margin company, with an industry average of 18%. A high degree of profitability is symbolic of the company’s economic moat (competitiveness).
What is the logic? It takes a lot of business acumen to operate a company at an above-average profitability level. It’s a strong indicator of high-quality management. Measuring a company’s profitability is easy. We can look at their profitability ratios and decide.
But more important here is to know if the company is operating at the above-average profitability levels. How to know it? By comparing the company’s ratios with that of its industry averages.
A company that displays numbers higher than its industry’s average can be called as profitable. To mark the most profitable share of an industry, we’ll look deeper. How? By analyzing their degree of profitability.
How do we identify the most profitable share?
We have written an algorithm that can filter profitable stocks based on the above concept. Our screening tool, the Stock’s Engine executes this algorithm and presents it as a report.
Allow me to give you a brief into the algorithm of the pre-built screener of the Stock’s Engine.
#1. The Ratios
The algorithm makes use of four profitability ratios to do the analysis. Why only four? Because I think these four ratios cover almost all aspects of the profitability of a business.
- ROE: This ratio inspects the profitability of a company from the shareholder’s perspective. It is the ratio between the company’s net profit and shareholder’s capital. It highlights the efficiency with which the company is using the shareholder’s funds to generate profits. Read more about ROE.
- ROCE: It analyzes profitability from the perspective of the effective use of capital. It is the ratio between the company’s EBIT and all capital employed by the company to yield profits. In ROE, only shareholder funds are used for analysis. But in the actual world, companies also use debt. Employed capital considers both sources of capital to analyze the company’s profitability. Read more about ROCE.
- Operating Margin: It checks if the company’s operations are profitable enough or not. It is a true indicator of an inherently profitable business. The company’s top managers may not look at ROE and ROCE numbers, but the operating margin is critical for them. Read more about operating margin.
- PAT Margin: It analyzes the profitability of a company from the stock market’s perspective. For the stock market, more important is the net profit (PAT). Why? Because generally dividend payouts are based on PAT. Even the price valuation of the company’s stocks is evaluated with respect to the net profit (EPS). Read more about net profit margin here.
These four ratios in combination can do near complete profitability scrutiny of any company. A company that scores high on all these numbers will get a high score.
#2. Calculation of The Industry Averages
This part was more challenging for the algorithm. There were two issues to deal with:
- Market Share of Each Company: The computation of the industry’s average numbers is not as simple as finding a mathematical mean of a few numbers. Why? Because it is also essential to consider the size of individual companies. The company must get its due weightage corresponding to the size it occupies in its own industry.
- Basis To Judge The Size of the Industry: To do this, we can use multiple metrics. The most logical ones are revenue and net profit. If we also want to consider the market’s estimate of the size of a company, we can also include market capitalization.
What we are trying to do? To calculate the industry average, we are calculating the weighted average of profitability. Suppose there are only two companies in an industry. Company A’s market share is 65%, and it operates at a 12% margin. Company B’s market share is 35% and it operates at a 15% margin. In this case, the overall profitability of the industry will be 65% of 12% + 35% of 15%.
Though the maths look simple, when there are over 150+ industries and about 4,000 number stocks to deal with, it gets tricky. Add to it another layer of sizing each industry based on multiple metrics like revenue, net profit, market capitalization, etc.
But to get a near-accurate industry average number, this kind of computation is necessary. I’m sure a manual calculation of this nature will not be easy. Hence, to save time, my Stock’s Engine algorithm does these calculations. The algorithm is coded to estimate the weighted average profitability of an industry.
I would also like to highlight that, companies operating in an inherently profitable industry automatically get an extra advantage. The algorithm favours these companies. But it does not ignore the degree of profitability of companies operating in low-margin industries.
#2. Comparison Between The Company & Its Industry
There are two layers of comparison done by the algorithm of The Stock’s Engine to screen profitable stocks. It first compares the profitability number of the industry with their respective stocks. The second layer calculates the degree of overperformance by a company compared to its industry’s average figures.
The result is that it filters and scores those companies whose profitability numbers are better than the industry averages. Moreover, it also scores companies based on their degree of profitability. Please note that both these analysis is done based on the four ratios as explained above (ROE, ROCE, Operating Margin, and Net Margin).
These two layers of scoring generate a GMR Score for each stock. The stock with the highest GMR Score (usually 100) can be tagged as the most profitable share of the Indian stock market.
This is an approach that I personally use to identify the most profitable shares for myself. What is the proof that these are good stocks and will perform well in the future? Generally, such stocks outperform the market in total-return terms. In some cases, such stocks may not display immediate price movement, it will eventually come.
The idea is to identify such profitable businesses early. If such stocks are held for a long term, they will surely yield above-average returns.
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Your orticle is highly useful for the public.You are providing very profitable information.
how have you calculated percentile scores and what it reflects to?. That is the only point out of understanding . Otherwise it was pretty simple and nice read .
It’s an algorithm based on which the stocks are scored for our Screener.
Interesting article, how have you calculated percentile scores
It is based on an algorithm
your article very helpful thank you
Hi..I read your articles..I really like your analysis. I request you to make an article about coffee can investing concept and suggest list of stocks based on this concept
Excellent idea but on which site will get readymade data or stocks.
Which one is better for investment indivisual stick or invest in nifty-50 if I invest in Ididivisual pl suggest 5 stocks.
If you are a beginner, starting with nifty will can be considered over individual stocks.
Thank you for your knowledge sharing. It’s very impressive and easy to read and understand.
Can you share the method of knowing average ROE & OPM of nifty 500 and nifty sectors as shown in the picture?
It has been obtained by calculating ROE & OPM of all constituent shares of Nifty.
Hi Mani, first of all hats off to you. I can surely co-relate with you as i have a same career path as yours with only exception you of being a financial expert.
The list shared here lists most profitable shares, but if i pick any one of these and run it through your stock analyzer that i purchased, it shows all these stocks are overvalued and scores below 85%. I didnt quite get this.
Thanks for your compliments. All profitable shares are not always trading at purchasable price.
Debt Free Stocks
Mani, very well researched, compiled work on many topics in the Financial Markets. Kudos ! With reference to your list of ‘Debt Free Stocks’ , you have listed many companies. Could you please share the parameter for sequencing these ? Secondly, it seems to be a partial list with many cash rich debt free companies missing, even though they may be having a high negative DMC figure (such as Infosys, Persistent Systems, etc) Is there some other parameter for this? Thanks
If you could sell an stock analysis worksheet for banking related stocks it will be good. Your traditional stock analysis worksheet not working for banking sector stocks..
Yes, it is not coded for banking stocks. The same has been declared in the product page. Thanks for your comment.
Sir your blog is very informative as well as a great tool for beginners to start understand what is share Market how, where and why investing in the market…. Also for experience players of market to grab the opportunity & enhance their knowledge….
Thank you for posting your feedback.
Very nice useful information
I have just started a job and recently graduated from the college, so i don’t know about where to invest, i am very much fascinated about the stock market. I want to invest for the long term but the shares you have suggested is very much costly like HEG, Bajaj finance ….. so can you please suggest stocks like mannupuram finance so that a no nothing investor can easily invest their money and good returns in future.
Hey Gaurav Goyal. I personally found PCJ, ONGC and Tata Motors doing well in the month of February to April. I have been able to make profit of more than 1.5 lacs by investing 1.2 lacs . So total of 2.7 lacs . I did short term investment. To know more you are welcome to visit
U can go for sbi card if u r keeping for long term
From where can we get average ROE and Operating Profit and Profitability figure for NSE-500 and Sectors.
appreciate your en-devour to help educate retail investors and the analysis is a good one of past performances.
the list thrown up is heavily tilted to Housing finance /NBFC? financing sectors. we are coming out of low interest regime which favoured these sectors with high returns. Most of these shares are being dumped by big institutional investors who manage huge sums of money.
Thanks for your comments. Banks, NBFC’s etc are inherently profitable companies. No investor can afford to stay away from them for an extended period of time. On one side we hear news of “institutions” dumping such stocks. On the other hand ace investor like Jhjhunwala is buying stocks like DHFL, why? Because when a good business is available @discounted price levels, it must be grabbed.
Thanks for this wonderfull artical ….. pl keep up the good work
FMCG giving negative returns is not a correct picture. I guess they are the once which are more profitable and are always trading at a very high P/E ratio
The overall FMCG sector is showing (-)ve values for ROE. Having said that, in the list of 50+ most profitable stocks, 5 are from FMCG Sector. This is evident from their high ROE & Op. Profit margins. But on one side this (high profitability) is an advantage, but on other side it also poses a risk (excessively high P/E ratio). More often than not such high P/E stocks leads to losses fro retail investors.
You are giving fruits to us,
We are just eating.
This is the best blog and provides a worthy guidance for the individuals who wish to invest in the stock market. This blog helps to identify the profitable stocks and gives a detailed information on how to analyze the companies based on their performance so that accordingly the individuals can take investment decisions. It also tells us on what basis the profitability of the company is measured. This article has explained the concept in a very detailed manner and has done a good research analysis.
Thanks for commenting.
EXCELLENT RESEARCH ANALYSIS
Thanks for liking the work and taking time to post your feedback. Awesome.
excellent article…very informative and conclusive…!!!
Thanks for posting your comment.
In-depth knowledge of the stock market.Very informative article.
Could you please give a detailed list of 121 sub sectors
Thanks for taking time to record your comment.
Thanks for posting your comment and appreciation.
Really helpful for the beginners like me.
Glad that you found the article helpful. Thanks for taking time to record your comment.
excellent information data
thanks for good information
You are most welcome. Please enjoy by reading more…
Dear Mani, I have lost 2 lakhs in the stock market recently because of day trading in equities and I entered the market without any guidance and experience. Now I have got some experience and seeking your advice regarding in which stocks should I invest so that I can get back my money at the earliest. I have 2.5 lacs to invest. Looking forward to hear from you. Regards, Rajendrakumar
Thanks for this wonderful article…pl keep up the good work