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Greater capital efficiency equals bigger profits… Here's how to use capital efficiency to find the best shares to buy

by , 03 July 2015

If you're looking for good investment opportunities, you need to delve into the financials of a company.

You want to check out aspects like a company's cash situation and how much it generates.

Another vital aspect is how efficient a company is with its capital. The more efficient it is, the more a company's shareholders benefit. And this is good news for you.

So how can you see how efficient a company is with its capital?

Read on to find out…

Working out a company’s capital efficiency

Capital efficiency involves looking at how much capital a company needs to maintain its facilities and grow its revenues.

If a company is spending all of its capital, it means there’s little to give to shareholders.

The best way to check the capital efficiency of a company is to see whether it gives more capital back to shareholders than it spends on its capital spending programmes.

A positive sign of a great company is one that gives more of its profits back to shareholders than its uses for capital investment.

The best shares to buy channel capital back to its shareholders

Take cool drink giant Coke. Last year, the company spent $2.4 billion on capital investments. During the same period, it spent $5.35 billion on dividends and $2.63 billion on share buybacks.

You can find these figures on a company’s cash flow statement.

The above figures show you that Coke spends far more on its shareholders than it does on itself.

If you find a company that performs like this, your investment is likely to be successful over the years. As the business continues to grow, the dividends will increase too. And this effect will help grow your wealth.

So there you have it. How to find the best shares to buy by looking at a company’s capital efficiency.

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Greater capital efficiency equals bigger profits… Here's how to use capital efficiency to find the best shares to buy
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