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Where to find huge returns on equity in 2018

Regan Pearson

One of the great free sources of investing data I use comes from valuation guru Aswath Damodaran.

The data covers a range of measures and multiples including average return on equity (ROE) by industry. You can find it here.

For 2017 the average return on equity globally (adjusted for Research and Development spend) was 11.2% which is a significant increase on the 8.2% in 2016.

So where should we look for huge returns in 2018?

Surprisingly, none of the industries I would think of as earning high returns, like software and healthcare products, made it into the top 10.

The table below shows three of the highest returning industries, as well as the returns for relevant local ASX companies in that industry:

Industry Average global ROE ASX listed company ASX Company ROE

Restaurant/Dining

31%

Domino’s Pizza Enterprises Limited (ASX:DMP)

19%

Collins Foods Limited (ASX:CKF)

14%

Household Products

23%

Blackmores Limited (ASX:BKL)

32%

BWX Limited (ASX:BWX)

14%

Beverage (Non Alcoholic)

21%

Coca-Cola Amatil Limited (ASX:CCL)

14%

Source: Damodaran Online, Company annual reports

Now, if you had asked me to guess the top 5 high return industries, I would not have picked a single one of these. They are all highly competitive which is not usually conducive to above average returns.

I’ve even written in the past that I think Coca-Cola Amatil is a “sell” in part due to its decline in brand value in a mature market.

Household products is another industry which locally has suffered with cut-throat competition. Big players in the industry Asaleo Care Limited (ASX: AHY), McPherson’s Limited (ASX: MCP) and Pental Limited (ASX: PTL) all lowered guidance in late 2017 with the common theme of pricing pressure from competition.

However there are certainly exceptions and as investors we want to find the great businesses within an industry which have etched out a niche to dominate.

Blackmores Limited (ASX: BKL) for instance stands out. The company reported an impressive return on equity in 2017 of 32% and has a history of strong returns. This is supported by being a high-volume seller with strong asset turnover (Revenue/Assets).

Similarly, although the Restaurant/Dining scene is undoubtedly tough, Domino’s Pizza Enterprises Limited (ASX: DMP) has dominated with its low cost model, investment in technology and customer value creation.

What it all means

Having a high return on equity is certainly not argument enough for an investment in any of these companies. However for the likes of Blackmores and Domino’s Pizza it does make a great starting point to dig further and identify potential moats or competitive advantages which may last into the future.

More reading

Motley Fool contributor Regan Pearson has no position in any of the stocks mentioned.

You can follow him on Twitter @Regan_Invests.

The Motley Fool Australia owns shares of and has recommended Blackmores Limited and BWX Limited. The Motley Fool Australia has recommended Coca-Cola Amatil Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.