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 Western Union (NYSE:WU), which rocks a whopping ROE of 263% over the past four quarters. Or look at Alliance Resource Partners (NASDAQ:ARLP), which boasts an ROE of 55.1%.
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 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 did 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 |
Return on Equity (TTM) |
|---|---|---|
|
Abbott Laboratories (NYSE:ABT) |
$85.9 billion |
26.9% |
|
Alliance Resource Partners |
$1.6 billion |
55.1% |
|
Ebix (NASDAQ:EBIX) |
$528.7 million |
28.7% |
|
Flowserve (NYSE:FLS) |
$5.6 billion |
25.2% |
|
Huntsman (NYSE:HUN) |
$2.9 billion |
37.9% |
|
Johnson & Johnson (NYSE:JNJ) |
$176.5 billion |
25.4% |
|
Western Union |
$13.4 billion |
263% |
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. 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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