If there is only one stock metric that you will use to analyse the quality of a company, that should be none other than Return On Equity (ROE).
Return on Equity to Filter for Good Stocks
Return on equity (ROE) measures the profitability of a company. It shows how efficient a company is at generating profits to shareholders.
Formula => Return on Equity = Net Income/Shareholder’s Equity
Thus, the higher the ROE, the better the company is in using shareholders money to maximize profit. Not only that, it often means that the company has a huge economic moat.
Durable companies with an economic moat can sustain their competitive advantages over its competitors and continue to reinvest their profits for a longer period of time.
Let’s take a look at 3 companies that have been delivering high ROE and reported Earnings Growth in the past years:
1. Riverstone Holdings Limited (SGX:AP4)
Riverstone Holdings Limited is a Malaysia-based company engaged in manufacturing and distributing cleanroom gloves, manufacturing plastic bags and trading latex products. The Company exports its products primarily to technology customers in Asia, the Americas and Europe. The Company has approximately four manufacturing facilities located in Malaysia, Thailand and China.
Revenue for 2017 improved 24.7% to RM 817million from RM 655million in 2016. Net profit improved 6.3% to RM 128million in 2017 from RM 120million in 2016.
Earnings per share for the whole of 2017 was up by 6.2% to 17.2 sen from 16.2 sen in 2016. Riverstone has a high and consistent ROE of more than 18% over the past 5 years.
The company was closing at S$0.985 on 12 June 2018. It was trading at 17x PE with a dividend yield of 2.18%.
Read more about Riverstone Holdings here!
2. AEM Holdings Limited (SGX:AWX)
AEM Holdings Limited is a company that provides solutions in equipment systems, precision components, plating and related manufacturing services across various industries. The company has manufacturing plants in Singapore, Malaysia, and China.
AEM sources its revenue from many countries such as the U.S., China, and Malaysia. It operates through three segments: Equipment systems solutions (ESS); Precision component solutions (PCS); and Others.
Revenue for 1Q 2018 improved 55.9% year-on-year to S$65.7 million. Net profit for the reporting quarter increased 77.5% year-on-year to RM 7.4 million. Earnings per share were up by 28.1% to 12.23 cents from 9.54 cents. AEM has high ROE of 54% in 2017.
AEM Holdings Limited was closing at S$ 1.25 on 12 June 2018. It was trading at trailing PE of only 3.6x with a EPS of 0.343.
3. Best World International Limited (SGX:CGN)
Best World International Limited (Best World) is a direct-selling company listed on SGX in 2004. The company is engaged in the distribution of nutritional supplement products, personal care products and healthcare equipment.
The Direct selling segment comprises sales to customers through direct selling channels in Singapore, Malaysia, Indonesia, Thailand, Taiwan, Hong Kong, Vietnam, Philippines, Korea, Australia and the United Arab Emirates.
Revenue for 2017 improved 10% to S$ 221 million from S$ 201 million in 2016. Net profit improved 61% to S$ 55.7 million in 2017 from S$ 34.6 million in 2016.
Earnings per share for the whole of 2017 was up by 6.08% to 10.1 cents from 6.28 cents in 2016. Best World International has an increasing ROE from 2.9% in 2013 to 43% in 2017.
Best World International was closing at S$ 1.27 on 12 June 2018. It was trading at around 12.5x PE and offers a decent 3% dividend yield.
Best World’s share price has taken a beating due to its weak 1Q FY2018 results. Want to know when to ride on this company’s growth again? -> Check out my “Top Stocks Under $2” here.
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