CSL and 2 other ASX companies with high ROE

Amcor PLC (ASX: AMC), CSL Limited (ASX: CSL) and Magellan Financial Group Ltd (ASX: MFG) are 3 ASX companies with high rates of return on equity.

| More on:
a woman

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

Amcor PLC (ASX: AMC), CSL Limited (ASX: CSL) and Magellan Financial Group Ltd (ASX: MFG) have all demonstrated their ability over the past 5 years to consistently produce high returns on equity (ROE). As an investor, this is a highly desirable attribute and as such I would expect that these three companies are often being considered for investment.

How have these three companies performed recently?

From 2014 to 2018, Amcor had the highest rate of ROE of these three companies, averaging in excess of 65%. During this same period Magellan and CSL both averaged in excess of 40%. Along with these high returns on equity, the companies have also produced high annual rates of return to shareholders. Over the past 5 years, Amcor has produced an annual rate of return to shareholders of 14%, while Magellan and CSL produced 41% and 28%, respectively.

What's so good about high return on equity?

ROE measures the amount of profit generated relative to the amount of capital invested by shareholders. The preference is for less capital to be required in generating large profits. As a company grows, continuing to produce high ROE becomes more and more challenging, as there is more capital which needs to be invested. Therefore, companies that can do this over the long term likely have superior management or a very strong business model.

ROE is often sighted as an excellent indicator of a company's overall economic performance. Searching for companies with high ROE can be a worthwhile method for refining a list of possible share investments. However, I don't believe this metric is enough to single-handedly justify an investment. Share price, company cashflow, the level of debt and the presence of a sustainable long-term competitive advantage are examples of some other worthwhile considerations.

Foolish takeaway

Companies that produce high ROE have the ability to generate significant returns to shareholders. Although I believe this metric is a good measure of a business's overall performance, it should not be used as the sole criteria for judging an investment opportunity. In particular, close attention should also be paid to the price of the share, ensuring that this price is justifiable. This will ensure greater returns on an investment over the long term.

Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. 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 Scott Phillips.

More on Share Market News

A man clenches his fists in excitement as gold coins fall from the sky.
Broker Notes

These ASX 300 shares could rise 35% to 65%

Analysts are tipping these shares to rise strongly from current levels. How high could they go?

Read more »

a man in a high visibility vest and hard hat holds a thumbs up at a mine site with heavy equipment in the background.
Broker Notes

What are brokers saying about BHP shares following the miner's quarterly results?

Analysts have crunched the numbers.

Read more »

A young girls clings in fright to a big red slide.
Share Market News

Here are the top 10 ASX 200 shares today

Investors were hitting the sell button hard today...

Read more »

A man in his 30s holds his laptop and operates it with his other hand as he has a look of pleasant surprise on his face as though he is learning something new or finding hidden value in something on the screen.
Share Fallers

ASX 200 insider buys up another $2,000,000 in company stock following Wednesday's 15% crash

This director took Buffett's advice to heart this week.

Read more »

A businessman looking at his digital tablet or strategy planning in hotel conference lobby. He is happy at achieving financial goals.
Broker Notes

Brokers name 3 ASX shares to buy now

Here's why brokers are feeling bullish about these three shares this week.

Read more »

Two happy excited friends in euphoria mood after winning in a bet with a smartphone in hand.
Share Gainers

Why Appen, Mayne Pharma, Playside, and PYC shares are storming higher

These shares are ending the week on a positive note. But why?

Read more »

Man on a laptop thinking.
Broker Notes

Why did Goldman Sachs just downgrade Wesfarmers shares?

The ASX 200 conglomerate has had a ripper run of share price growth. So why is Goldman Sachs downgrading it?

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why AIC Mines, Fletcher Building, Nufarm, and Wesfarmers shares are dropping

These shares are having a tough finish to the week. But why?

Read more »