Emerging Giants Newsletter – June, 2018

In the long run, good accounting quality and efficient capital allocation (in some ways reflected in higher ROCEs) define investment success. A look at longer-term stock returns suggests a direct relationship between better accounting quality and superior stock performance. Similarly, over the long run, there is a strong link between ROCEs and share price performance. Yet in the shorter run, markets do have a tendency to test patience even with most time-tested and rational investment methods. For instance, the bull market of CY17 saw speculative excesses being created in lower quality stocks. In CY 2017, the worst 20% stocks on accounting quality outperformed the Sensex by nearly 35% points.