Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Three Stocks With Legitimately High Returns on Equity: Mastercard Inc (MA), Monster Beverage Corp (MNST), Fossil Inc (FOSL)

The investing measure known as return on equity is a popular metric in which an investor can evaluate a management team’s effectiveness. Return on equity addresses how much profit a company turns from the amount of money shareholders have invested. The higher the percentage, the better a company’s management is at employing a firm’s equity in a manner that is accretive to shareholders. It’s a fairly straightforward concept, but at the same time is vulnerable to manipulation.

The way to calculate return on equity is to divide trailing twelve month net income by total shareholder equity. However, the amount of shareholder equity on a company’s balance sheet is derived from the relationship between the corresponding assets and liabilities. It’s possible to have a rather highly indebted company exhibit a high return on equity, and therefore mislead investors. After all, the more liabilities on a company’s balance sheet, the lower the level of shareholder equity (since assets+liabilities=equity). Lower shareholder equity is a lower denominator in the return on equity calculation—and therefore a higher resulting ROE.

However, there do exist companies that not only have high returns on equity, but also have low levels of debt on the balance sheet.  In this sense, these companies truly ‘earn’ their high returns on equity.

Diverse stocks with two similarities: high growth, no debt

Monster Beverage Corp (NASDAQ:MNST) is a marketer and distributor of energy drinks and alternative beverages. Net sales rose 15% during the fourth quarter and 21% for the full year. Net income clocked in at $1.86 per diluted share during 2012, as opposed to $1.53 per diluted share the year prior, representing a 22% increase.

Monster Beverage Corp (NASDAQ:MNST) carries a spectacular return on equity ratio of 53%, with negligible long-term debt on the balance sheet. In addition, the company sports a current ratio of 2.9 times, meaning Monster Beverage Corp (NASDAQ:MNST) has almost three times as much short-term assets as short-term liabilities.

Mastercard Inc (NYSE:MA) is a $63 billion credit card giant, and has performed incredibly as of late. The company’s shares have almost doubled over the last two years. Mastercard Inc (NYSE:MA) reported positive results for its fiscal fourth-quarter, with revenues rising 10%. Earnings per share clocked in at $4.86, beating analyst expectations by five cents.

Full-year results were even more impressive, as diluted earnings per share soared 48% on the strength of a 10% increase in net revenues year over year. Furthermore, the growth profile for Mastercard Inc (NYSE:MA) going forward is encouraging, as the company’s focus on emerging markets has led it to predict 20 percent compounded annual growth of earnings per share from 2013-2015.

Mastercard Inc (NYSE:MA)’s return on equity is a very solid 40%, especially when you consider that the company carries a current ratio of 1.9 times and a long term debt-to-equity ratio of just 9%.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.