Features | Education | 1 Mins Read | by
In the March 2019 issue of Master Investor Magazine, I had a look for high-quality European blue chips.
Three key criteria can lead to high-quality earnings per share growth (EPS). Strong EPS growth will lead to the strong share price growth as long as the valuation is not stretched. Earnings growth needs to be backed by cash.
The three criteria:
1) Companies need to be able to generate high returns. A high ROCE, earnings backed by cash and a high operating profit margin.
2) Companies must be able to sustain high returns.
3) There must be high-return growth opportunities.
In short, to compound value a company must: 1) Generate high returns, 2) Maintain high returns and 3) Realize high-return growth.
The hard part is determining if a business can sustain high returns over the long-term. When all three are in place things the share price should also deliver.
L'Oreal a case in point
The Paris-headquartered cosmetics group offers a case in point. The company has maintained relatively high returns while cosmetics demand is continuing to grow. The net result is that L'Oreal's share price has performed well over the long-term:
L'Oreal has delivered high-quality growth: earnings per share and free cash flow per share