Where To Invest Now?

As markets worldwide tumble, we bring to you stocks as per the metric the world's best investors use to pick their biggest winners

- Arul Selvan, Karthik Anand Vijay and Udhayaprakash

The most important indicator in evaluating a possible investment is the ability of a company to earn a high rate of return for every rupee or dollar that it invests in its business. This measure is known as return on incremental capital and it is a secret yardstick the world's best investors use to pick their biggest winners.

What is return on incremental capital and why is it important?

Most profitable companies re-invest a part of their profits every year back into the business to earn even higher profits in the following year. This is where the return on incremental capital comes in. It is a measure of how much profit a company generates for every rupee invested back in the business. Those that earn high rates on incremental capital will generate higher returns for their shareholders.

Here is Buffett talking about the importance of generating a high return on incremental capital: Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.

Read it again. Buffett says the best business to own is one that can employ a large amount of incremental capital at very high rates of return.

In this anniversary Issue of 'Wealth Insight', we bring you the best companies with the highest return on incremental capital.

The price at which you pick such companies is the second part of this equation. It is not sufficient to pick a company that earns a high rate of incremental return. You also need to pick them up at a substantial discount to make money.