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
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
|
CAPS Rating
|
---|---|---|---|
Altria |
76.6% |
$47.5 |
**** |
Amerigas Partners |
39.4% |
$2.5 |
**** |
Buckle |
34.5% |
$1.1 |
**** |
Campbell Soup |
73.2% |
$12.5 |
**** |
Colgate-Palmolive |
88.3% |
$36.7 |
***** |
Freeport-McMoRan |
41.7% |
$31.5 |
**** |
General Mills |
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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