Return on equity is one of the most popular ways for investors to assess the efficiency of a business before they buy a stock. Return on equity is a measure of profitability relative to shareholder’s equity.
Return on equity is calculated by dividing net income by the company’s assets minus its debt. In other words, return on equity is the ratio of net income to net assets.
Why Is It Important?
In practical terms, return on equity and return on assets are two different indicators of how well a company’s management is using its assets. Like ROA, ROE varies widely from industry to industry, but it's a quick way to measure efficiency among a group of peers in the same business.
For example, if one auto company has an ROE that is half as high as a competitor, it may be a sign that management should consider restructuring the business or updating its assets. A low ROE could be a sign that a company needs to divest unproductive assets to counter a potentially bloated balance sheet.
A growing ROE over time suggests management is pulling the right levers to improve efficiency. However, each business has a limit as to just how high the ceiling for ROE can be based on the productivity of the assets in that industry.
High ROE Stocks
Here are 13 stocks in the S&P 500 that currently have the highest ROEs, according to Finviz:
- Hilton Hotels Corporation (NYSE: HLT), 900.7% ROE.
- IDEXX Laboratories, Inc. (NASDAQ: IDXX), 769.6% ROE.
- O'Reilly Automotive Inc (NASDAQ: ORLY), 391.7% ROE.
- Moody's Corporation (NYSE: MCO), 372.4% ROE.
- S&P Global Inc (NYSE: SPGI), 332.4% ROE.
- Lockheed Martin Corporation (NYSE: LMT), 292.4% ROE.
- H & R Block Inc (NYSE: HRB), 288.6% ROE.
- United Parcel Service, Inc. (NYSE: UPS), 130.3% ROE.
- Mastercard Inc (NYSE: MA), 125.7% ROE.
- Clorox Co (NYSE: CLX), 118.9% ROE.
- Seagate Technology PLC (NASDAQ: STX), 105.5% ROE.
- Mettler-Toledo International Inc. (NYSE: MTD), 100.0% ROE.
- Qualcomm, Inc. (NASDAQ: QCOM), 98.5% ROE.
Because ROE doesn’t take into account debt levels, many of the companies on the list of the highest ROEs have high debt-to-equity ratios as well. To get the best view of a stock’s full fundamental picture, the best investors consider all available information and incorporate dozens of fundamental metrics into their analysis rather than relying entirely on one or two numbers.
Do you agree with this take? Email firstname.lastname@example.org with your thoughts.
11 Stocks With The Highest Gross Margins
See more from Benzinga
© 2019 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.