These days, success isn't just about working hard. It's more about working hard and efficiently. So why not apply that strategy to your investments?
To measure a company's efficiency, you can examine its return on equity (ROE): its profit margin, multiplied by its asset turnover, further multiplied by its financial leverage. ROE measures how efficiently the company employs its owners' capital -- your bang per buck as an investor. Take Colgate-Palmolive (NYSE: CL ) or Altria (NYSE: MO ) both of which boast ROEs of 70% or more. That's a lot of concentrated bang.
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 things being equal, though, the higher the ROE, the better: A higher ROE means a more efficient company, which in turn means a more effective executive team managing the business. You should consider companies like these 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 four and the maximum five stars. The high ratings indicate the companies are more likely to outperform the market.
- ROEs of 25% or greater.
- Market caps of $500 million or greater, to keep us out of microcap land.
Here are seven companies that I like:
|
Company
|
Return on Equity (TTM)
|
Market Cap
(in billions)
|
CAPS Rating
(out of 5)
|
|
Altria
|
76.6%
|
$47.5
|
****
|
|
Amerigas Partners (NYSE: APU )
|
39.4%
|
$2.5
|
****
|
|
Buckle (NYSE: BKE )
|
34.5%
|
$1.1
|
****
|
|
Campbell Soup (NYSE: CPB )
|
73.2%
|
$12.5
|
****
|
|
Colgate-Palmolive
|
88.3%
|
$36.7
|
*****
|
|
Freeport-McMoRan (NYSE: FCX )
|
41.7%
|
$31.5
|
****
|
|
General Mills (NYSE: GIS )
|
28.3%
|
$22.8
|
****
|
Data from Motley Fool CAPS. TTM = trailing 12 months.
While the stock screener is a great tool, it should be only the first step in your research. 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 165,000-member-strong community help you make better investing decisions. It's free.
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