Smart investors often look for companies with less or no debt on its shoulders and a high return on capital employed (ROCE). Zero debt implies less risk because the company does not have to worry about interest payments which eat into their profits. A high ROCE on the other hand shows the company is good at making profits with its money or in other words is highly “Capital Efficient.”
This is a great combination, especially when markets are shaky, because these companies are more stable and can still grow making some solid returns for investors.
Smaller companies with these qualities are even more interesting. No debt makes them safer, and a high ROCE means they are likely to give good returns. For anyone who is looking for growth clubbed with possible stability, these kinds of companies can be a sweet spot. They are often newer businesses with strong foundations.
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Let us look at 2 less known smallcap companies, that recently got rid of their debt and have an impressive ROCE.
Steelcast Ltd (SCL)
With a market cap of Rs 1,658 cr, Steelcast Ltd is engaged in the business of manufacturing Steel and Alloy Steel Castings catering to a host of OEMs for diverse industrial sectors.
SCL offers casting products like Carbon Steel, Low Alloy Steel, High Alloy Steel, Manganese Steel, and other Superior Grades of Wear and abrasive resistant Steel Castings produced by Bake and Shell Moulding Processes.
It is one of few casting companies to manufacture steel castings through the sand and shell moulding process to produce 300+ parts ranging from 2.5 kg to 2,500 kgs.
Here is how SCL’s debt trajectory looked for the last decade…
Debt 2014Debt 2017Debt 2019Debt 2022Debt Preceding YearCurrent Debt137.2289.664.4323.1123.650*All figures in Rs Cr
With the burden of paying interest off their shoulders, the company is well poised to grow profits at a better rate than earlier.
Add to that their current ROCE, which is 40% and it makes the company worthy of a spot in our watchlist. ROCE means the returns a company makes on the capital it employs. For example, if the company is investing a capital of Rs 100,
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