Title: How Watching This Key Metric Could Help You Beat the Stock Market
In the world of investing, there are many metrics to consider when making decisions about where to put your money. One key metric that has proven to be valuable in beating the stock market is the return on equity (ROE). This metric, favored by legendary investor Warren Buffett, can provide valuable insights into a company’s profitability and efficiency in generating profits.
The ROE is calculated by dividing a company’s net income by its shareholders’ equity and multiplying by 100. A high ROE indicates that a company is able to generate strong returns for its shareholders. Buffett looks for companies with a consistent ROE of at least 15% and compares it to its peers over a period of time, typically five years.
One example of a company with a high ROE is Constellation Software (TSX:CSU), a top TSX stock that has seen impressive growth over the years. With a five-year ROE of nearly 44%, Constellation Software has outperformed the market and tripled investors’ money. The company’s strategy of acquiring, managing, and building vertical market software businesses has led to durable and growing cash flows and revenues.
While Constellation Software may seem expensive at $3,625 a share with a high price-to-earnings ratio of 41, the company’s high earnings growth potential makes it a worthwhile investment. As Warren Buffett famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
For investors looking to invest in Constellation Software but may not have the capital to buy a full share, commission-free trading platforms like Wealthsimple offer the option to buy partial shares, allowing investors to invest according to their budget and schedule.
In conclusion, paying attention to key metrics like ROE can provide valuable insights into a company’s performance and help investors beat the stock market. Constellation Software serves as a prime example of a company with a high ROE and strong growth potential, making it a compelling investment opportunity for those looking to outperform the market.
Source: The Motley Fool Canada
