These days, it's not all about working hard. It's more about working hard and efficiently. Why not apply that strategy to your investments?
To measure a company's efficiency, you can examine its return on equity (ROE). This ratio is composed of a company's profit margin multiplied by its asset turnover, multiplied by its financial leverage. It measures how efficiently the company employs its owners' capital. In a nutshell, it measures your bang per buck as an investor.
Take Philip Morris International (NYSE: PM ) , which rocks a whopping ROE of 95.8% over the past four quarters. Or look at Foster Wheeler (Nasdaq: FWLT ) , which boasts an ROE of 52.4%.
Companies can juice their ROE by employing more debt, so it's important to consider a company's debt level when looking at ROE. All else being equal, though, the higher the ROE, the better -- a higher ratio means a more efficient company, which means a more effective executive team when it comes to managing the business. It's companies like these you should consider for your portfolio.
To uncover some of the most efficient companies around, I ran a screen using The Motley Fool's CAPS screening tool. I looked for companies with:
- CAPS ratings of five stars, the highest granted by our CAPS community.
- ROEs of 25% or greater.
- Market caps of $500 million or greater.
And voila! Here's what popped up from my screen:
|
Company
|
Market Cap (in billions)
|
Return on Equity (TTM)
|
|
Foster Wheeler
|
$3.5
|
52.4%
|
|
Gilead Sciences (Nasdaq: GILD )
|
$43.1
|
42.5%
|
|
Infosys Technologies (Nasdaq: INFY )
|
$32.0
|
26.8%
|
|
Partner Communications (Nasdaq: PTNR )
|
$3.5
|
50.8%
|
|
PepsiCo (NYSE: PEP )
|
$97.4
|
34.1%
|
|
Philip Morris International
|
$94.8
|
95.8%
|
Data from Motley Fool CAPS. TTM = trailing 12 months.
While the stock screener is a great tool, it should only be the first step in your investment research. Double-checking why a company might have a really high ROE is a good first step. For instance, Philip Morris' ROE is so high because the level of equity has been lowered thanks to a massive share buyback program over the past couple of years.
Further steps -- for example, examining other levers of specific companies, such as return on invested capital, liquidity, and debt-to-equity ratios -- will also help you determine if a company is right for your portfolio. When you include those other metrics in your analysis, you'll get a fuller picture of whether that company is worth buying.
Start increasing the efficiency of your investments at Motley Fool CAPS today. Let the collective wisdom of our 145,000-member-strong investment community help you make better investing decisions.
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