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3 companies with growing returns on equity

Return on equity is the profit a company is able to make expressed as a percentage of the total shareholder investment in that company.  A high return on equity indicates how efficiently shareholder money is being employed to generate profits. Normally, better-managed companies should generate higher returns on equity.

Here are three companies with year-on-year return on equity growth.

Fund manager and diversified financial services business Perpetual (ASX: PPT) grew its year-on-year return on equity more than 16% in FY 2013. It’s harnessing the effects of a radical transformation strategy scheduled for completion in 2015.

The strategy involves slashing staff numbers and the costs of non fee-earning services such as human resources, information technology, marketing and corporate support. Even excess office space has been vacated, in the quest to reduce the group’s expenses footprint.

Perpetual also looks to have won the battle to acquire trustee services business The Trust Company (ASX: TRU), after its shareholders voted in favour of accepting an improved takeover offer last week. Perhaps most importantly, for the September quarter Perpetual has just reported its first-quarter of net fund inflows in more than four years. This may be the company’s inflection point — reflecting a revamped distribution strategy and improving sentiment thanks to strong fund performance.

Founded in a Perth garage in 1993, telecommunications services provider iiNet (ASX: IIN) has a year-on-year return on equity growth more than 40% for FY 2013. It also has one of the highest net profit after tax growth rates among Australia’s top 200 companies, at an impressive 64.5%. iiNet’s founder and chief executive Michael Malone has recently taken a three to six-month sabbatical, but investors can rest assured he won’t be far away and will be  driving the company on again soon enough.

With almost every household in Australia now connected to the internet, iiNet management will have to find new growth strategies in an increasingly crowded market. The business has recently grown through acquisitions and is marketing itself more heavily on the populous eastern seaboard. It has taken on some debt to fund those acquisitions and looks at fair value for long-term investors.

CSL (ASX: CSL) is perhaps Australia’s most impressive high-tech business, it grew year-on-year return on equity more than 35% in FY 2013 and continues to boost margins, with profit growth forecast to climb approximately 10% in 2014. It manufactures life-saving medicines for critical-care hospital patients.

As the global market leader, it has excellent pricing power – a term analysts use to describe a company’s ability to keep raising prices without lessening the demand for its products. Company management also invests heavily on research and development, and with a long history of successful product innovation, don’t be surprised if it keeps delivering on this front as well.

Foolish takeaway

Quality companies don’t come cheap and ones that can consistently lift their return on equity ratios while their share prices rise would appear to be under sound strategic management. All three of these companies also pay healthy dividends as a percentage of profits generated, while also looking to grow through acquisitive activity.

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Motley Fool contributor Tom Richardson owns shares in iiNet and CSL. 

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