Chicago, IL – August 11, 2010 - Stocks in this week's article include CarMax, Inc. KMX, Tempur-Pedic International Inc. TPX, Tractor Supply Co. TSCO, Union Pacific Corporation UNP and Vishay Intertechnology, Inc. VSH. 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 criteria 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 (which includes reinvested earnings). The formula for ROE is calculated as: Income / Average Shareholders Equity (past 12 months).
I think ROE is a great item to use regardless of what kind of investor you are – whether it be Growth & Income or Value or even Aggressive Growth or Momentum. 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.
The screen I'm running this week has me looking for companies with…
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CARMAX GP (CC) (KMX): Free Stock Analysis Report
TEMPUR-PEDIC (TPX): Free Stock Analysis Report
TRACTOR SUPPLY (TSCO): Free Stock Analysis Report
UNION PAC CORP (UNP): Free Stock Analysis Report
VISHAY INTERTEC (VSH): Free Stock Analysis Report
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