In this clip from Industry Focus: Tech, Motley Fool analyst John Rotonti shares a few of the most important metrics he uses to measure the investment potential of companies that have piqued his interest.
A transcript follows the video.
This podcast was recorded on July 1, 2016.
Dylan Lewis: I'm glad you brought up ROE before. I think, any time I have an investor talk about how they think about investing, the structure, it's always important to say, what metrics are you looking at? Do you have a checklist-type approach? Or,what's the lens that you are looking at these companies through? Is ROE one of them?
John Rotonti: ROE is definitely one of them. I do use a checklist when I'm both investing for myself or recommending companies to either Inside Value or Motley Fool One. In general, I tend to focus on companies that I understand, one; companies that I admire, two; and then, companies that I consider of the highest quality. I'll define quality briefly as companies that generate high returns on equity and high returns on capital over a long period of time, and I think have the ability to continue to generate those high returns into the future. So, that's one indicator that the company has a competitive advantage, protecting its economics from the competition. Return on equity is definitely one of the ones I look for.
I look for companies that generate a lot of free cash flow and that have a management team that intelligently knows how to allocate those free cash flows, either into reinvesting back into the business at high returns on equity or returning money to shareholders through dividends or smart share repurchases. And then I look for strong balance sheets.