CHICAGO, March 9, 2011 /PRNewswire/ -- Stocks in this week's article include: Arch Chemicals, Inc. (NYSE: ARJ), Cabot Corp. (NYSE: CBT), CARBO Ceramics Inc. (NYSE: CRR), Deckers Outdoor Corp. (NASDAQ: DECK) and Super Micro Computer, Inc. (NASDAQ: SMCI). Kevin Matras looks at how to use Return on Equity (ROE) to find winning stocks.
Screen of the Week written by Kevin Matras of Zacks Investment Research:
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.
The formula for ROE is calculated as: Income / Average Shareholders Equity (past 12 months).
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.
I think ROE is a great item to use regardless of what kind of investor you are. Seeing how a company makes use of its equity and the return it makes on it are important measures 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. 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. And a better understanding of the factors that affect ROE and how to best use it will help make it even more valuable to you.
The screen I'm running this week has me looking for companies with…
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