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5 great companies to buy with high returns on invested capital 

Return on invested capital (ROIC) is a strong predictor of share price performance over the long run, and is often used (perhaps most famously by Warren Buffett and Joel Greenblatt) as a measure of business quality.

Sustainable high returns on invested capital facilitate compounded growth for a company, which should, over time, be reflected in the share price. Here are five strong companies on the ASX with high ROIC that may serve investors well in a buy and hold strategy. 

CSL Limited (ASX: CSL)

CSL is an international biopharmaceutical company that is engaged in the research, development, manufacture, and marketing of vaccines and blood plasma protein biotherapies for the prevention and treatment of rare and serious medical conditions. Historically, the company has achieved high returns on invested capital and has been able to maintain this despite continued growth. At over 25% ROIC based on the trailing 12 months, CSL is in a strong position to continue to grow, notwithstanding some decrease in its ROIC over recent years (which was 39% in 2013). 

Cochlear Limited (ASX: COH)

Cochlear is a manufacturer and distributor of cochlear implantable devices for people who are hearing impaired. The company has operations in more than 20 countries across the Americas, Asia, the Middle East, Europe and Asia Pacific regions. Cochlear has an outstanding ROIC at 62%, with this number increasing over the last few years. Strengthening ROIC is a great sign for the prospects of an already great company and should allow Cochlear to continue to grow at a good pace. 

Carsales.com Ltd (ASX: CAR)

Carsales.com is a company that operates primarily as an online advertising service through automotive, motorcycle, and marine classifieds. The company provides online advertising through its websites in the form of classifieds and display advertising. It also operates a data and research service to provide a range of solutions to customers, including analysis, research and reporting. Carsales has recorded a ROIC of over 500% over the last two years, down from even higher levels prior to that.  This should put the company in a great position to provide excellent growth in intrinsic value for shareholders. 

DuluxGroup Limited (ASX: DLX)

The Dulux Group manufacture and market a range of paints, coatings, and home improvement products. Its brands include mostly premium products and include Dulux, Cabot’s, Berger, and British paints. The Dulux Group also operate a garage doors and openers segment, a Lincoln Sentry segment which supplies and distributes hardware and components to various industries, as well as other business segments including Yates Garden Care. Dulux Group has consistently recorded a ROIC of over 20% over the last five years, and currently sits on a ROIC of 26% based on the trailing 12 months. For a very steady business, its growth should be strong with a continued ROIC above 20%. 

REA Group Limited (ASX: REA)

REA Group is a digital advertising company that operates residential, commercial, and share property websites including classifieds and advertising. Its websites include realestate.com.au, realcommercial.com.au, flatmates.com.au, iProperty.com, and myfun.com. ROIC for REA group has been very high over a number of years, including a ROIC of over 1,600% based on the trailing 12 months.  These numbers should see compounded growth for REA that will continue to reward shareholders over many years. 

The Disruptors: 3 Revolutionary Aussie Companies to Back for 2018

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That’s why at The Motley Fool we’ve been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.

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Motley Fool contributor Stewart Vella owns shares of CSL Ltd. and REA Group Limited. The Motley Fool Australia has recommended carsales.com Limited, Cochlear Ltd., and REA Group Limited. 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.

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