S&P 500   4,975.51
DOW   38,563.80
QQQ   427.32
Higher VIX just made Realty Income’s 6% dividend better
Why Banks Could See a "Cash Frenzy" on March 11 (Ad)
Super Micro Computer: Overbought, undervalued or mispriced?
Booking stock is the discounted growth story in travel stocks
Better Than Oil Stocks (Ad)
3 E-VTOL stocks: Which ones can fly higher in 2024?
Capital One's bid for Discover carries expectation that Americans won't slow credit card use
Better Than Oil Stocks (Ad)
Walmart’s uptrend is intact; buy it when it dips
XPeng stock just got a target boost, analysts say it could double
S&P 500   4,975.51
DOW   38,563.80
QQQ   427.32
Higher VIX just made Realty Income’s 6% dividend better
Why Banks Could See a "Cash Frenzy" on March 11 (Ad)
Super Micro Computer: Overbought, undervalued or mispriced?
Booking stock is the discounted growth story in travel stocks
Better Than Oil Stocks (Ad)
3 E-VTOL stocks: Which ones can fly higher in 2024?
Capital One's bid for Discover carries expectation that Americans won't slow credit card use
Better Than Oil Stocks (Ad)
Walmart’s uptrend is intact; buy it when it dips
XPeng stock just got a target boost, analysts say it could double
S&P 500   4,975.51
DOW   38,563.80
QQQ   427.32
Higher VIX just made Realty Income’s 6% dividend better
Why Banks Could See a "Cash Frenzy" on March 11 (Ad)
Super Micro Computer: Overbought, undervalued or mispriced?
Booking stock is the discounted growth story in travel stocks
Better Than Oil Stocks (Ad)
3 E-VTOL stocks: Which ones can fly higher in 2024?
Capital One's bid for Discover carries expectation that Americans won't slow credit card use
Better Than Oil Stocks (Ad)
Walmart’s uptrend is intact; buy it when it dips
XPeng stock just got a target boost, analysts say it could double
S&P 500   4,975.51
DOW   38,563.80
QQQ   427.32
Higher VIX just made Realty Income’s 6% dividend better
Why Banks Could See a "Cash Frenzy" on March 11 (Ad)
Super Micro Computer: Overbought, undervalued or mispriced?
Booking stock is the discounted growth story in travel stocks
Better Than Oil Stocks (Ad)
3 E-VTOL stocks: Which ones can fly higher in 2024?
Capital One's bid for Discover carries expectation that Americans won't slow credit card use
Better Than Oil Stocks (Ad)
Walmart’s uptrend is intact; buy it when it dips
XPeng stock just got a target boost, analysts say it could double

Use Return On Equity To Find Stocks Delivering Profit For Every Dollar Invested

Use Return On Equity To Find Stocks Delivering Profit For Every Dollar Invested

What's a winning combination that measures a company's strength?

The answer is: High return on equity and low debt.

Let's start with return on equity, a key measure of a stock's health. It indicates how much profit a company generates for every dollar invested. To derive the return on equity, take a company's yearly net income and divide that by the total shareholder equity. Multiply that number by 100 to arrive at the ROE percentage.

Fortunately, you don't have to perform that calculation yourself. MarketBeat provides that ratio on its company profile pages. For example, here's a look at the profile for Apple NASDAQ: AAPL. Scroll down to the "profitability" data on the right side. There, you'll see the ROE percentage.

ROE is a good measure of how efficiently company managers are putting capital to work. It also shows you how a company's profitability is tracking, relative to its growth. As a company's equity increases, it becomes more challenging to sustain a high ROE percentage.

Of course, earnings per share is another good, and very commonly used gauge of profitability, relative to ownership. ROE is simply another way to view profitability as it pertains to equity and offers a deeper glimpse into a company's strength.

Researchers found that an ROE of 17% or higher is a good place to begin adding stocks to a watch list. That's not the only criteria - increasing sales and earnings are also key screening components - but it's one you might consider adding to the mix.


There are a couple of caveats. 

First, there's a connection between ROE and a company's profit margin. Sometimes, you'll see a company with strong annual pre-tax profit margins, yet its ROE is below 17%, or below that of industry rivals. In those cases, you might make an exception to the 17% rule. Those cases are fairly rare, however, and you want to be sure the pre-tax margin is above the average for the company's industry.

There is also a relationship between profit margins and return on equity. In some cases, you might allow for a below-peer ROE, if the company is churning out top-notch annual pretax margins. In general, annual pretax margin of 17% or higher is a sign of fundamental strength. You also want to see if a company's pretax margin is among the best in its industry.

The second caveat pertains to debt. 

Many firms borrow money to finance new projects. As those products and services become profitable, ROE grows. However, you’ll often see those companies post both high ROE and somewhat high levels of debt. 

As you identify companies with high ROE, check their industry peers. What kind of ROE and debt levels do competitors have? If your company has a higher-than-average ROE as compared to its industry, and its debt is somewhat higher than average, those factors may be connected. 

The industry comparison is necessary, as some industries are more capital-intensive than others. For example, airlines require far more capital to operate than software companies. A comparison of debt levels between companies in those disparate industries would essentially be meaningless.  

But in general, a high debt-to-equity ratio is riskier for lenders and investors alike, as it increases the chances that a company may not be able to service its debt if it runs into difficult times. 

On the flip side, it can raise red flags if a company fails to take advantage of leverage to finance growth. Institutional investors can ferret out companies that may not be realizing their full potential because they avoid borrowing to finance potentially profitable endeavors. 

As you hone your stock-screening chops, you’ll quickly learn that there’s no single gauge that will deliver that perfect “aha” moment for discovering the next big thing. 

But ROE is a strong metric to include in your research, as it can illuminate a company’s use of capital relative to other firms in its industry. That can show you whether the stock you’re considering has an advantage over competitors and has a better likelihood of delivering the return you’re seeking.

→ Income Expert and Author of Get Rich With Dividends Is Giving Away His Top Income Secrets… FOR FREE! (From The Oxford Club) (Ad)

Should you invest $1,000 in Apple right now?

Before you consider Apple, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Apple wasn't on the list.

While Apple currently has a "Moderate Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.

View The Five Stocks Here

10 "Recession Proof" Stocks That Will Thrive in Any Market Cover

Which stocks are likely to thrive in today's challenging market? Click the link below and we'll send you MarketBeat's list of ten stocks that will drive in any economic environment.

Get This Free Report

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Apple (AAPL)
4.8805 of 5 stars
$181.56-0.4%0.53%28.28Moderate Buy$205.27
Compare These Stocks  Add These Stocks to My Watchlist 

Kate Stalter

About Kate Stalter

  • stalterkate@gmail.com

Contributing Author

Retirement, Asset Allocation, and Tax Strategies

Experience

Kate Stalter has been a contributing writer for MarketBeat since 2021.

Additional Experience

Series 65-licensed investment advisor, financial advisor, Blue Marlin Advisors; investment columnist for Forbes, U.S. News & World Report

Areas of Expertise

Asset allocation, technical and fundamental analysis, retirement strategies, income generation, risk management, sector and industry analysis

Education

Bachelor of Arts, Saint Mary’s College, Notre Dame, Indiana; Master of Business Adminstration, Kellogg School of Management at Northwestern University

Past Experience

Founder, financial advisor for Better Money Decisions; editor, stock trading instructor for Investor’s Business Daily; columnist, podcast host, video host for MoneyShow.com; contributor for Morningstar magazine


Featured Articles and Offers

Apple Stock - Best Days Ahead or Behind It?

Apple Stock - Best Days Ahead or Behind It?

We explore Apple stock's undervalued Services Unit, dissect recent controversies impacting short-term prospects, and analyze its iPhone sales trajectory.

Search Headlines: