Chicago, IL – October 20, 2009- Kevin Matras looks at how to use Return on Equity (ROE) to find winning stocks. Highlighted stocks in this week’s article include Bucyrus International, Inc. (NASDAQ: BUCY), Investors Bancorp, Inc. (NASDAQ: ISBC), Steris Corp. (NYSE: STE), Syniverse Holdings, Inc. (NYSE: SVR) and Wolverine World Wide, Inc. (NYSE: WWW). Click here for the full story exclusively on Zacks.com: http://at.zacks.com/?id=5528.
Screen of the Week written by Kevin Matras of Zacks Investment Research:
This week I want to talk about Return on Equity.
Return on Equity, or ROE, is a commonly used measure of management efficiency. It’s a favorite screening criterion of many money managers and investors, including myself, because it tells you how successful a company is at using its shareholders’ capital.
Moreover, companies with steadily increasing ROEs are generally better managed with attention being paid to the details.
Return on Equity shows how much profit a company is making on its shareholder equity.
The formula for ROE is calculated as:
Income / Average Shareholders Equity (past 12 months)
The Income number for a company is listed on their Income Statement.
Shareholders Equity is the difference between Total Assets and Total Liabilities, and is found on a company’s Balance Sheet.
ROE is always expressed as a percentage. So a company with a ROE of 10%, for example, means it created 10 cents of assets for every one dollar of shareholder equity in a given year.
How to Use
I think ROE is a great item to use regardless of what kind of investor you are – whether it be Growth & Income, Value or even Aggressive Growth or Momentum. Seeing how a company makes use of its equity, and the return it makes on it, is an important measure to look at.
It can also alert you to problems when it’s falling.
Another great way to use the ROE is to compare it to its Industry.
Some industries require greater assets than others to run their business. Take the Steel Industry versus the Software Industry for an extreme example. (Steel has a median ROE of 13.5%, while the Computer Software-Services has a median ROE of 7.5%.)
If you screened for only absolute numbers, you may miss some great stocks in some great groups.
So trying to find companies with the best ROEs relative to their group (Sector or Industry etc.) is one of the best ways of making an apples-to-apples comparison in an effort to find the top stocks.
ROE can be a powerful screening criterion for investors in measuring how effective management has become, and how profitable they are in using investors’ cash.
A better understanding of the factors that affect ROE, and how to best use it, will help make this criteria even more valuable to you.
The screen I’m running this week has me looking for companies with:
- ROE >= 5 Year Avg. ROE
- ROE >= Avg. for their Industry
- Zacks Rank = 1 (Strong Buys)
Here are 5 stocks from this week’s screen (for 10/20/09):
BUCY Bucyrus International, Inc.
ISBC Investors Bancorp, Inc.
STE Steris Corp.
SVR Syniverse Holdings, Inc.
WWW Wolverine World Wide, Inc.
There is simply no better tool to create and backtest winning screens than with Research Wizard. Along with Return on Equity, you’ll have more than 650 different items to choose from along with access to some of our best proven, profitable strategies. Get started with your free trial today: http://at.zacks.com/?id=5529.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the “#1 site for screening stocks” by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use. Each week, Zacks Profit from the Pros free email newsletter shares a new screening strategy. Learn more about it here http://at.zacks.com/?id=5530.
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it’s your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros http://at.zacks.com/?id=5531.
Follow us on Twitter: http://twitter.com/ZacksInvestment.
Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.
Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.
Contact: Jim Giaquinto