The key to identifying a good company is to find one that has strong profitability. The ability to generate a good return on equity is vital. A company earning more than 15% return on equity is doing better than the market average, but we would typically look for companies generating 20% or more.
What we look for in a company – determining the best stocks to buy
A consistently growing profit year on year, which in turn should drive the return on equity higher into the future is good for company valuations, and we monitor this closely.
We like companies whose earnings come from operating activities and where the dividend is franked, rather than earnings generated largely by financing or investing activities.
Another important factor is the amount of debt a company has on its books in order to run its business. We typically would not like to see more than 50% net debt relative to equity, as that indicates too high a degree of leveraging. However, some business models are built on a certain level of debt and that needs to be taken into consideration where appropriate.
Our fund managers take all of these items (and the qualitative ones that are outlined in the next video) into consideration when considering investing in a business, and this is even before the value of a stock relative to its current price is identified.
In addition to the raw numbers, reports available within the MyClime system itself discuss these issues for many companies to enable investors to find their way through the mass of data available.