Stock screeners can be a useful starting point for generating a list of companies based on any attributes which can be quantified.

Warren Buffett has been known to focus on growing companies with consistently high returns on equity, which shows how effectively a company generates profits for its shareholders. A company which can achieve a high return on equity with little or no debt is even more impressive.

Buffett has said:

“As long as we can make an annual 15 percent return on equity, I don’t worry about one quarter’s results”.

The genius of Warren Buffett can never be replicated by a stock screener, however, perhaps we can use some of his ideas as a way to generate a list of stocks for further research.

Once you have a list of stocks – qualitative analysis is the other side of the coin. This might include research to better understand a company’s product or service; the overall industry tailwinds or headwinds and where the company sits in relation to its competitors; the quality of the management team, and many other factors.

Using the Google stock screener, I searched for companies with:

  • Return on equity of at least 15%;
  • 5-year earnings per share growth rate of at least 10%;
  • No long-term debt; and
  • Market capitalisation of at least $1 billion.

I excluded valuation metrics – so whether or not any of these companies are currently cheap is a separate question.

Only the following six companies ticked all the boxes:

 Company Return on Equity EPS Growth Rate (5 Year) 12  Month Price Change
Corporate Travel Management Ltd (ASX: CTD) 15.16% 34.4% 47.64%
Technology One Limited (ASX: TNE) 32.18% 14.26% 44.67%
Flight Centre Travel Group Ltd (ASX: FLT) 21.67% 12.86% -9.35%
Sirtex Medical Limited (ASX: SRX) 31.99% 19.32% 3.62%
REA Group Limited (ASX: REA) 41.49% 31.58% 50.74%
Magellan Financial Group Ltd (ASX: MFG) 68.35% 110.68% 25.15%

As a group, they have been strong performers, with an average share price return of around 27% over the last 12 months.

It’s no surprise to see REA Group on any list of great businesses. It never looks cheap, however, the powerful competitive advantage from its network effect is likely to mean it continues to grow well into the future.

International equities manager, Magellan has had incredible results in the last five years as its funds under management have skyrocketed.

Corporate Travel has built an impressive global business with organic growth boosted by a series of acquisitions.

Technology One is a highly profitable software company which has also delivered huge returns to investors and often seems to be overlooked when discussing great Australian companies.

As can be seen from the returns over the last 12 months, Sirtex and Flight Centre have been out of favour recently. In my view, both are worthy of further research at current prices.

Flight Centre is down around 30% from its high in the last year. It is facing increasing competition from the likes of Corporate Travel, however, it is well managed, cashed up, and cheap relative to its earnings.

Sirtex has continued to report strong growth in sales of its targeted liver cancer therapy product. Shares have recently recovered 25%, but it remains well down from its high in the last year. Analyst consensus is a 12-month price target of close to $40, suggesting around 25% upside from the current price.

The importance of return on equity is just one lesson we can learn from Warren Buffett's incredible investing success.

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Motley Fool contributor Matthew Bugden has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.