How to spot a great company to invest in

Julie Brownlee, Fsp Invest, 13 Jul. 2015

Tags: invest, return on capital employed, roce, best shares to buy, investing in shares,

When you invest in shares, you want to pick the best companies to put your money into. But how can you tell what makes a great company to buy?

One measure worth calculating is return on capital employed (ROCE).

So what is ROCE? And how can you use it to find the best companies to invest in?

Read on to find out…

What is return on capital employed (ROCE)?

ROCE is a very useful calculation to use when weighing up a company to invest in.

What ROCE does is look at a company’s trading profits as a percentage of the money or assets it has invested in the business.

The simplest form of ROCE uses equity raised from selling shares and any loans it has totted together to give you the total money a company has invested in its business.

This is all the capital a company uses to generate a return. In other words, the money a company uses to generate profits.

The figure you get is like an interest rate. The higher a company’s ROCE, the better it is for you as an investor.

How you can use ROCE to find the best companies to invest in

ROCE tells you a lot about the management of a company.

It shows how good they are at investing the company’s money. To put it another way, it shows how hard a company’s management team can get its money working for the business.

Using ROCE instead of just focusing on profits alone can tell you a lot more about how good a company’s performing. This is because a company can flatter its profits by acquisitions or by making other investments.

By doing this, a company isn’t necessarily making the best use of its money. And they may not deliver good returns for the business over the long run.

When using ROCE, calculate it for a minimum of five years to see what the overall trend is. If a company shows a consistently high ROCE, it can be a sign of a fantastic company to invest in.

So there you have it. How to spot a great company to invest in.

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