By Matthew Smith
In part one, we had a look at why Economic Value Added (EVA) and EVA Momentum (EVAM) are fantastic ratios to employ when deciding whether to pull the trigger and purchase a particular business.
Enough with the theory let us apply these ratios in practice to help guide you in selecting the best businesses in the Australian equities market.
The starting line up of businesses will be the ASX 100. We will use a tough five gate model to help us determine the greatest businesses.
Zero accounting adjustments have been made as a 10 year period is more than enough to iron out any oddballs.
The Five Gates
Gate 1 - Sustained double digit dividend growth for 10 years
Gate 2 - An average return on capital employed of > 12% over 10 years
Gate 3 - A positive return on incremental capital employed
Gate 4 - A positive EVA average for 10 years
Gate 5 - An average EVAM of > 1% for 10 years
To make the final cut a business needs to pass through each gate, and here are the results of those businesses that made it through all five gates;
These are the best of the best and the greatest businesses in Australia. You can see for the past 10 years Woolworths & Woodside Petroleum have added on average $570 million of value each year for its owners.
We hope all these stocks are on your 'to buy list' as they are certainly on ours!!
Note: We haven’t published the results for Gates 1 through to 3 in this article, however, if you would like this information please let us know. Call (07) 4771 4577.