There can't be many ASX listed blue-chip stocks in better shape than blood product company CSL Limited (ASX: CSL).
In the 2018 financial year, CSL increased reported sales revenue by 15%, invested US$700 million into research and development and paid out US$672 million in cash dividends to investors.
On their own, these are signs of a strong, cash-rich business. Together they represent something we should all be on the hunt for as investors: a sustainable competitive advantage.
A growing history of strong returns on equity
Businesses with sustainable competitive advantages can grow and compound at above-average returns for long periods and CSL is a perfect example.
In the 2018 financial year, CSL produced a monster return on equity (ROE) of 42%, completely blowing away the 6% average for U.S. healthcare product companies. And this wasn't just a one-off. Below we can see how the company's ROE has held up over the previous financial years:
| CSL Limited (All USD) | 2018 | 2017 | 2016 | 2015 | 2014 |
| Net Income ($m) | 1,729 | 1,337 | 1,242 | 1,379 | 1,307 |
| Total equity ($m) | 4,080 | 3,164 | 2,567 | 2,746 | 3,162 |
| ROE | 42% | 42% | 48% | 50% | 41% |
Source: CSL Ltd 2018 Annual report
It's revealing to see how consistent CSL has been in maintaining a high ROE, but there are other insights here too.
First, we can see the drop in both net income and equity between 2015 and 2016. This occurred as CSL began investing into its newly acquired Seqirus Influenza business, reducing net income and taking on more debt. Both points show that CSL was reinvesting for long-term growth which the business is starting to reap today.
We can also see a big increase in the company's equity in 2018 which is almost entirely from retained earnings as the company's value increased. Remember how CSL paid out US$672 million in dividends last year? Well with reported net income of US$1.73 billion, cash that wasn't distributed to investors was being reinvested, lifting assets and thus shareholder equity.
Foolish Takeaway
Tracking metrics like return on equity over time help to monitor if a company is maintaining or growing its competitive advantage. In the case of CSL, the ongoing strong returns and growing equity base are a great reason to want to own the company today.
