When the returns from a mid cap and large cap equities are same, then it makes no sense to invest in mid cap equities. The mid cap equities are considered more risky than the large cap equities because of various underlying reasons. However, the fact is that when the market is in revival stage, many of the mid caps can outperform the large caps and this is the time when investments in mid caps are more preferred than the large caps.
What to look for before investing in mid cap?
You can read, compare and interpret the following:
- Return on Equity (ROE) – It measures the company’s efficiency in utilization of its assets to produce earnings. It also indicates the rate at which the company can grow without raising funds from the market. It indicates how well the company is able to manage its equity and debt.
- Return on Capital Employed (ROCE) – Return on Capital Employed sets a comparative study on the profitability of the company based on the capital used by it. If the business needs to survive for long then ROCE should be more than the cost of capital. If this is the situation, then investment in this company can be planned otherwise the investment in this stock should be avoided. ROCE in nutshell measures the efficiency of the management of the company.
- Debt-Equity Ratio – Debt equity ratio is the ratio between company’s own funds and external or borrowed funds. It indicates how well the company is able to fund its growth. A low value of debt equity ratio indicates less risk of investment in this company. Whereas, a high ratio indicates that the business can be finically hit because of the fixed interest bearing obligations.
- Interest Coverage Ratio (ICR) – Interest coverage ratio measures how well the company can meet up its interest obligation. In other words, the ratio indicates that how many times the interest payments can be made from the earnings of the company. A company with a high interest coverage ratio is considered financially strong enough to survive adverse financial situations.
- Institutional holdings – The institutional investors generally do a lot of research before actually investing in any company. That is, if you want to research on a mid cap company, then instead of doing a hard wok you should do a smart work. Trust the studies made by the institutional investors. Since they have already done a rigorous study, and have invested ultimately, then it is indicative of the fact that they must have seen potential in the company. Therefore, what all you have to do is keep an eye on the company’s shareholding pattern and take your decision accordingly.
A company who has been able to manage its working capital cycle better in comparison to the industrial norms and is in a position to post free cash flows should find its place in your priority list. Moreover, a company with a year on year growth potential should also be looked as an investor’s choice. A good and a strong management can never be a substitute for anything else. The bottom line is that you should avoid those mid cap companies that have performed poorer than their peers.
Who says that mid caps are not for investment purposes? Choose the mid cap companies by following the indicators and right strategies and keep yielding more than what you can get from long cap equities.