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Looking for good stocks to invest in for the long-term? Here's how to find them with one calculation

by , 22 July 2014

An investment strategy favourite of Warren Buffett is investing in companies with economic moats. These are companies that have ‘something' that means their customers will keep coming back.

Think about Coca-Cola, Gillette and Apple.

So how can you find such a company? There's one key calculation to help you unearth them.

Read on to find out more…

Using ROCE to find a company with an economic moat

If you’re looking for an investment strategy to find a company with a resilient economic moat, there’s one easy way to find them. That’s to look for companies that over the years have a consistent high return on capital employed (ROCE).

ROCE looks at a company’s trading profit as a percentage of the money or assets invested in the business.

To look at it simply, ROCE is the money invested in the company, Phil Oakley in Money Week explains. In other words the equity and the debt. The figure you get is like an interest rate. So the higher the ROCE is, the better it is for you as an investor.

This key calculation shows you just what the company’s doing with its money and how hard it’s getting that money to work.
 
ROCE is better to look at than other measure, such as profits. It’s a truer reflection of what’s going on within the company.

You need to calculate ROCE for a minimum of five years and look at the trend. If the company is producing a high and stable ROCE, it can indicate the business is very good at what it does.

How to check a company has a solid economic moat with ROCE

You want to find companies that deliver good returns for their investors.

With any business that’s doing well, competitors will enter the market place to try to steal some of the business. If this happens, a company’s returns will start to suffer.

If you manage to find a company that keeps its ROCE high over the long-term, say five to ten years, then this suggests that the company is very good at beating off any rivals. And this is a good indication of a strong company to invest in.

So there you have it, how to use one calculation to find robust stocks to invest in for the long-term.

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Looking for good stocks to invest in for the long-term? Here's how to find them with one calculation
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