Investing in companies with very high rates of return on shareholders' equity is a strong wealth creation strategy. Companies who can earn upwards of 20% returns per annum on every dollar of equity over many years can turn a small investment into a very large one.
It can be even better if that company has very low levels of debt so that earnings can be reinvested in the business at high rates of return, as opposed to using the cash to pay interest debts.
Here are three companies with really high returns on shareholders' equity, and minimal debt.
A2 Milk Company Ltd (ASX: A2M)
The A2 milk company markets, distributes, exports and sells milk and infant formula. The company has trading activities in Australia, New Zealand, China, USA and UK. Its products are free of the a1 protein that is usually present in cows' milk, and include only the a2 protein which the company says does not cause discomfort for those who have difficulty digesting ordinary milk. The company reported a return on equity of 37% last year, and holds more cash than liabilities.
Lovisa Holdings Ltd (ASX: LOV)
Lovisa is a jewellery retailer with over 300 stores across Australia, New Zealand, Singapore, Malaysia, South Africa, Spain, France, the USA and the United Kingdom and franchised stores in the Middle East and Vietnam. The company runs a vertically integrated business model, through which it develops, designs, sources and merchandises its Lovisa branded products. The Lovisa products are aimed at fashion conscious females aged 25-45.
Lovisa reported a return on equity of over 100% in 2017, and very high returns are forecast for the next three years.
OFX Group Ltd Fully Paid Ord. Shrs (ASX: OFX)
OFX Group offer international payment and foreign exchange services. Last year, it paid a dividend of 5.7 cents per share, a return of 3.7% at the current share price and a payout ratio of 71%. The company reported a return on equity of over 30% in 2017, with analysts forecasting similar rates of return over the next 3 years.
Foolish takeaway
For those with long time horizons, high rates of return on equity can turn small investments in strong companies into very large ones. Letting your dollars compound at very high rates of return over many years is a fantastic wealth creation strategy. The A2 Milk Company, Lovisa Holdings, and OFX Group are three companies with very high rates of return that I'd consider buying today.
