Course 406: Slow-Growth Stocks
What's the Return on Capital?
In this course
1 Introduction
2 How Fast Is the Company Growing?
3 How Consistently Is the Company Growing?
4 Does the Company Generate a Dependable Stream of Free Cash Flow?
5 What's the Company Doing with Its Money?
6 What's the Return on Capital?
7 How Has the Stock Performed?
8 Is the Stock Priced Like a Slow Grower?
9 Conclusion: What Do I Get in Return?

In addition to returning money directly to shareholders through dividends or buybacks, a good company should earn a high return on its shareholders' money. On the surface, Procter & Gamble has done very well. The company's return on equity (ROE) has grown to the mid-30% range, putting it in the top 10% of its industry as of the end of 1999. Those are attractive numbers, but there are some warning signs to watch out for. P&G's improved ROEs in 1998 and 1999 were the result of increased debt, as its financial leverage rose from 2.7 to 3.1. The company's return on assets (ROA) actually declined in 1998, and it continued to fall into 1999. Procter & Gamble remains much more profitable than most companies in the consumer-products industry, but the two trends--lower ROAs and more debt-reliant ROEs--need to be halted. For a company that doesn't dazzle with its growth, high returns on capital are one of the key attractions.

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