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ARM Holdings plc Could Help You Retire Early

The raison d’etre of any management team at any business across the world is to maximise profitability.

Sure, creating a sustainable business (and products) and being a responsible business are also noble aims, as are adding value to the world through innovative goods and services. However, all management teams live and die by the bottom line.

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So, on that basis, the management at ARM (LSE: ARM) (NASDAQOTH: ARMH.US) seems to be doing a terrific job, since it is an extremely profitable company and is adding value to the world via innovative products.

Indeed, ARM delivered a return on equity of 13.3% last year. This doesn’t sound too impressive until the fact that the company has next to no debt is taken into account. This means that the return on equity figure has not been inflated in any way via a capital structure that increases risk in exchange for higher returns to equityholders.

More importantly, ARM’s return on equity has increased significantly over the last 5 years. It was just 5.8% in 2008 but is clearly moving the right direction.

Furthermore, with net profit set to grow at a very past pace in the next three years, return on equity should (in theory) move much higher than the current 13.3% level. This highlights just how profitable ARM could be over the medium term.

Allied to this is a share price chart that seems to offer an attractive entry point for investors.

Shares in ARM had a strong finish to 2013 and hit highs of over 1100p by year-end. However, the first three weeks of 2014 have seen its shares pinned back to under 1000p, while the wider stock market has made modest gains.

This seems to have been the result of some profit taking as well as one or two analyst downgrades to ARM. However, downward pressure on the share price from these two specific actions is unlikely to last beyond the short run.

This, then, could present an ideal opportunity to buy in to a company that is improving its bottom line (and return on equity) at a brisk pace. Through being so profitable, it may just help you to retire early.

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Peter does not own shares in ARM.

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