5 ROE Stocks To Profit From Solid Economic Fundamentals

The U.S. equity markets hit record highs, shrugging off the panic triggered by the outbreak of coronavirus, which reportedly spread across continents affecting more than 24,000 people and killing nearly 500 in China alone. Buoyed by solid economic fundamentals, such as the expansion of the manufacturing sector, solid factory orders, healthy job market and robust consumer spending, leading benchmark indices witnessed a remarkable turnaround. The markets were further boosted as the People's Bank of China injected billions of yuans and proposed plans to halve tariffs on $75 billion worth of U.S. imports. Solid quarterly performance led by technology, energy, financials and healthcare sectors, and political stability, driven by President Trump’s acquittal from the impeachment process were other catalysts.

As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they can benefit from ‘cash cow’ stocks that garner higher returns. However, singling out cash-rich stocks alone do not make for a solid investment proposition unless these are backed by attractive efficiency ratios, like return on equity (ROE).  A high ROE ensures that the company is reinvesting its cash at a high rate of return.

ROE: A Key Metric

ROE = Net Income/Shareholders’ Equity

ROE helps investors distinguish profit-generating companies from profit burners and is useful in determining the financial health of a company. In other words, this financial metric enables investors to identify stocks that diligently deploy cash for higher returns.

Moreover, ROE is often used to compare the profitability of a company with other firms in the industry — the higher, the better. It measures how well a company is multiplying its profits without investing new equity capital and portrays management’s efficiency in rewarding shareholders with attractive risk-adjusted returns.

Parameters Used for Screening

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