One thing that leaves me startled as an investor is how little attention is paid by the media to the return that equityholders receive.
Certainly, we often hear about earnings growth, price to earnings ratios and whether a company has strong cash flow or dividends, but return on equity is a ratio that means a lot to Fools and yet is not heard discussed all that often.
Really, it should be talked about a lot more because, put simply, it is the return generated by the company for equityholders and offers an indication of how profitable a company is, as well as how quickly its earnings may grow in future years.
Anyway, one stock that delivers a high return on equity is Imperial Tobacco (LSE: IMT) (NASDAQOTH: ITYBY.US).
Indeed, over the last 5 years return on equity has averaged 16.8% per year, with it being in the double digits throughout and being as high as 23.5% in 2011. Last year it was 17% and looks set to remain in the mid to high teens over the medium to long term.
Of course, not only is Imperial Tobacco delivering above-average returns for its equityholders, it has a stability that few FTSE 100 peers can match, in terms of the return on equity range being relatively narrow.
This is perhaps to be expected for a highly defensive product such as tobacco, but it does show that with all the ‘taper talk’ going on, Imperial Tobacco could be a good long term bet as it looks set to continue delivering relatively high returns for its equityholders.
Furthermore, Imperial Tobacco does not appear to be excessively priced and trades at a price to book value of 3.9. This means that investors are currently buying £1 of net assets plus £2.90 goodwill, highlighting the high levels of profitability and efficient use to which Imperial Tobacco is able to put its assets.
Such levels of goodwill do not appear to be excessive and, indeed, it could be argued that a higher amount of goodwill is warranted (and a higher share price) due to the aforementioned high and stable return on equity figures.
What does all this mean? It means that Imperial Tobacco looks to be good value and capable of delivering relatively high returns for its investors. As such, its addition to your portfolio could help you retire early.
