If there is only one stock metric that you will use to analyse the quality of a company, that should be none other than Return On Equity (ROE).
Return on Equity to Filter for Good Stocks
Return on equity (ROE) measures the profitability of a company. It shows how efficient a company is at generating profits to shareholders.
Formula => Return on Equity = Net Income/Shareholder’s Equity
Thus, the higher the ROE, the better the company is in using shareholders money to maximize profit. Not only that, it often means that the company has a huge economic moat.
Durable companies with an economic moat can sustain their competitive advantages over its competitors and continue to reinvest their profits for a longer period of time.
Let’s take a look at 3 companies that have been delivering high ROE and reported Earnings Growth in the past years:
1. Riverstone Holdings Limited …