3 signs you’ve found a great company

Here are some signs you’ve found the next Domino’s Pizza Enterprises Ltd. (ASX:DMP) or CSL Limited (ASX:CSL).

| More on:
Graphic representation of bull share market

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One of the cool things about being a small investor is the absolute discretion we have when it comes to finding companies.

It’s our money after all, so we can be exceptionally picky and hold out to find the next Domino’s Pizza Enterprises Ltd (ASX: DMP) or CSL Limited (ASX: CSL).

Here are three signs I look for which can signal a great company;

1. The company drives repeat business or recurring revenues

I don’t eat much pizza, but every year Domino’s still manages to solicit slices of my hard-earned money.

Pizza, by the way, is probably the greatest sharing food ever invented. Moving house? Domino’s. Team lunch? Domino’s. Watching rugby with mates? Domino’s.

The company manages to harvest people like me for repeat business because it brilliantly meets my needs in a highly efficient and consistent manner.

Another quite different example is Emerchants Ltd (ASX: EML). Emerchants operates gift and reward cards for businesses including malls and gambling outfits. Customers to these operators repeatedly use the cards, loading and redeeming credit which Emerchants processes through its own system.

2. The company consistently produces strong returns

It takes something special in a company to produce above average returns. This can be measured various ways, but one of my favourites is the return on equity (ROE) measure.

The average return on equity for listed U.S. companies in 2015 was about 10%, but I like to bump that up to about 25% as the measure of a great company.

Producing consistently strong returns suggest that a company is a superior operator, or has a significant competitive advantage which will help it dominate its market.

A clear example is healthcare star CSL Limited (ASX: CSL), which produces returns on equity of almost 50%. Although returns on equity can be inflated by taking on heaps of debt, in my view CSL’s current debt levels are reasonable.

3. Still… bugger all debt is usually best

You’ve heard this before, but having a ‘strong balance sheet’ is an investing platitude for good reason.

Young or old, big or small, a company with conservative or very little debt is far more favourable than one with a debt burden.

Young, growing companies often don’t have the spare cash to service debt, while large, mature companies can still get into trouble if their debt pile grows and economic conditions shift.

Santos Ltd (ASX: STO) is a perfect example, having loaded up on debt to fund capital expenditure then getting caught out by falling energy prices and having to offload assets and raise equity.

Maintaining very little debt leaves room for growth and to take advantage of attractive acquisition opportunities – another sign of a great company.

Motley Fool contributor Regan Pearson 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »