Which Industry Is Better?

Javvad Vakharwala

There are about 5000 listed companies in the market and analyzing each of them is not possible. Legendary investor Charlie Munger said, “Fish Where The Fishes Are”. It means that if you have a pond with a high number of good fishes then why you will fish in a pond with a high number of rotten fishes. The same goes for the industry. If you have a good industry in which almost every company is earning a decent economic profit then why you will go for the industry with less profitable companies.

Philip Fisher said, “Profitability of a company depends 90% on the Industry, 9% on the management and 1% on the Company”.

One of the key determinants to judge an industry’s attractiveness is to find its Economic Profit.Economic Profit is the return company has generated over and above its Cost Of Capital. To analyze all the companies, we have to calculate the RoIC (Return On Invested Capital) of the companies, but there are more than 5000 Companies listed on BSE and NSE, so for the time constraint I calculate RoCE (Return On Capital Employed)

Discussing The Formula:

Return On Capital Employed = (EBIT-Cash Taxes)/Total Capital Employed

EBIT-Earnings Before Interest And Taxes

Total Capital Employed = Debt (Long Term Debt+ Short Term Debt+ Current Maturities Of Long Term Debt) +Equity+ Reserves

Cost Of Capital refers to Opportunity Cost by choosing one investment avenue over others. If we invest in a company instead of investing in NIFTY 50 which has provided a CAGR of 13.05% over 10 Years then the company in which I have invested should provide me more than NIFTY 50 Returns. Therefore here we have taken the Cost of Capital as NIFTY 50 return.

Economic Profit = RoCE (Return On Capital Employed) – CoC (Cost of Capital)

Method To Calculate Weighted Average Economic Profit:

  1. List down all the sectors from BSE
  2. List down all the companies in that sector.
  3. RoCE of 10 Years from Screener.
  4. Calculate Economic Profit (RoCE – CoC)
  5. Calculated Average Economic Profit Of Last 10 Years
  6. Calculate Capital Of all the Companies.
  7. Calculate Companies Capital As A % Of Total capital
  8. Calculate Weighted Average Economic Profit (Companies Capital As A % Of Total Capital*Average Economic Profit Of Last 10 Years)

Refer to the link below for the Economic Profit of all industries.

Industry Economic Profit

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