Return On Equity Approach Reveals Profitable Prospects

In this article I cover a strategy that identifies stocks with strong return on equity (ROE) and give you a list of stocks that currently pass the AAII Return on Equity screen. Return on equity may help to reveal profitable firms, but does Wall Street reward the stock prices of these firms? The AAII Return on Equity screen has gained 10.7% annually since inception in 1998, while the S&P 500 index has returned 5.6% annually over the same period.

Measuring Profitability By What Shareholders Earned

Return on equity is a popular measure of profitability and corporate management excellence. The measure is determined by dividing the firm’s annual earnings by shareholder’s equity. This relates earnings generated by a company to the investment that shareholders have made and retained within the firm. Shareholder’s equity is equal to total assets of the firm less all its debt and liabilities. Also known as stockholder’s equity, owner’s equity or simply equity, it represents investors’ ownership interest in the company. It is also known as the book value of the company.