If, as an investor, you’re only looking at sales and earnings growth, there's a chance that a vital question is not being asked: how is that growth being funded?
Top analysts and investors such as Warren Buffett and Michael Mauboussin say capital allocation - the deployment of company time, money, ideas, and people - is the key to building moat-like quality and profitability characteristics. This is important as moat characteristics are perhaps the most fundamental driver of future share price performance.
In other words, if you find a company that consistently allocates its capital profitably, chances are you are onto a long-term winner with strong economic moats. Cropenergies Ag might be one such company.
Screening for upwardly mobile, high quality companies
Using a ratio such as return on equity (ROE) is useful to determine how well and efficiently a company is deploying its capital. It is calculated by dividing net income by book value of equity.
It’s no coincidence that Buffett is a fan of the measure - many companies with high ROEs tend to exhibit the high-quality, moat-like business traits that he is so fond of gaining exposure to.
One of the stocks that currently exhibits a high ROE is Cropenergies Ag. The group has:
A trailing twelve month return on equity of 15.7%
An average current year EPS forecast upgrade of 2.56% from brokers, and
A one-year relative strength of 57.4%
To find high ROE stocks whose fantastic business models are being rewarded by the market, it is best to use a stock screen that selects only stocks with both positive one-year relative strength and upgraded current year broker forecasts. The former ensures these shares have been outperforming the market and the latter suggests outperformance can continue.
Studies indicate that combining factors such as Value, Quality and Momentum is a more effective way of outperforming the market over longer time frames. That's why we have constructed our StockReports to give an instant impression of how well exposed Cropenergies Ag (ETR:CE2) is to these three factors. We go into greater detail on factor investing in this video.
Stockopedia helps you to identify return-enhancing factors such as Quality, Value and Momentum by analysing thousands of data points every day. To find out more about you find investment opportunities and analyse your portfolios then take one of our two-week free trials and have a look around.