How to Find Stocks with Consistent ROE

If you're serious about finding high-quality stocks for your portfolio, then understanding Return on Equity (ROE) is crucial. ROE, in simple terms, measures how efficiently a company is using shareholders' equity to generate profit. For value and growth investors alike, a consistent ROE can indicate the presence of strong, well-managed companies. But how do you find stocks that have a consistent ROE over time?

Why is ROE Important?

At its core, ROE is a profitability ratio, calculated as:

$ROE=\frac{NetIncome}{ShareholdersEquity}$ROE=Shareholders EquityNet Income​

This metric shows how much profit a company is generating from every dollar of shareholders’ equity. A higher ROE indicates that the company is more efficient in using its equity base to grow profits. It’s one of Warren Buffett’s favorite metrics, and for good reason: a company with a consistently high ROE often has a durable competitive advantage and excellent management.

However, the real secret lies not just in identifying high ROE, but in finding consistency in the ROE over several years. A high ROE for one year might be a fluke, but multiple years of high ROE demonstrate that a company has something more enduring.

How to Find Stocks with Consistent ROE?

1. Use Stock Screeners

Stock screeners are your best friends when looking for stocks with specific financial criteria. There are many stock screeners available, such as those provided by websites like Yahoo Finance, Morningstar, and Finviz. You can filter stocks based on their ROE performance over multiple years.

Here’s how you can do it:

• Set ROE filters for at least 15% or higher over a period of 5 years.
• Add other financial health criteria like low debt-to-equity ratio to ensure the company's high ROE isn't due to excess leverage.

Most screener tools allow you to download this data into Excel or CSV files so that you can further analyze or track these stocks over time.

2. Analyze Financial Reports

While stock screeners give you a list of companies, diving into the financial reports of these companies helps you understand how they maintain consistent ROE. Consistent ROE can stem from a variety of factors:

• High profit margins or expanding margins over time.
• Efficient capital allocation strategies.
• Regular share buybacks, which reduce the equity base and can artificially increase ROE if not done prudently.

To analyze ROE, look for patterns over at least five to ten years of financial data. Companies with ROEs that fluctuate wildly may not have the long-term stability you're seeking.

3. Focus on Industry Leaders

Industry leaders or companies with strong competitive moats tend to maintain consistent ROE over time. For example, companies in the technology and consumer staples sectors are known for strong ROE performance because they often benefit from high margins, economies of scale, or recurring revenue models. On the flip side, industries with low barriers to entry or high capital intensity—like airlines or retail—often have lower, more volatile ROE.

4. Examine Management and Governance

High ROE can be a sign of excellent management. Investigating a company's management and governance practices can help you assess if the ROE is sustainable. Companies with transparent governance and a track record of good capital allocation decisions—such as reinvesting profits wisely or paying dividends—are often those with consistent ROE.

Companies with Consistent ROE

To provide a sense of what high-ROE stocks might look like, here are a few companies that have demonstrated this quality over time:

• Apple (AAPL): Apple's ROE consistently hovers around 50%. This is driven by its enormous profit margins, strong brand loyalty, and innovative product lineup.

• Microsoft (MSFT): Microsoft maintains a strong ROE above 30%, driven by its cloud services, software subscriptions, and high-margin businesses.

• Visa (V): Visa’s ROE has consistently been above 20%. The company's ability to generate massive profits from its transaction processing network, without heavy capital expenditures, has made it a strong ROE performer.

Pitfalls to Watch For

While a high ROE is generally a good thing, there are some potential pitfalls:

• High Debt: Some companies artificially inflate their ROE by using excessive leverage (i.e., borrowing money to finance operations). This can be risky, as these companies are more vulnerable during economic downturns when servicing their debt becomes more difficult.

• Unsustainable Margins: A high ROE driven by short-term factors like a temporary spike in margins may not be sustainable. It’s crucial to examine the source of the company’s profitability and whether it’s likely to persist.

• Share Buybacks: Companies that engage in aggressive share buybacks can also show inflated ROE, as buybacks reduce the equity base. While buybacks can be a good thing, they are not always a sign of healthy, sustainable returns.

Tools for Tracking ROE

Here are some additional resources you can use to track ROE over time:

1. Morningstar: Provides in-depth reports and historical data on ROE for various companies. It also offers a breakdown of other important metrics that can give you insight into a company’s long-term performance.

2. Yahoo Finance: With Yahoo Finance, you can set up a stock watchlist and track ROE over time, in addition to other key financial ratios.

3. MSN Money: Offers free access to financial ratios, including ROE, for thousands of companies. You can view both annual and quarterly data.

Conclusion

Finding stocks with consistent ROE isn’t about just picking stocks with the highest ROE. Instead, you need to understand how the company achieves its ROE and whether it can continue doing so in the future. By using stock screeners, analyzing financial statements, and focusing on industry leaders, you can build a portfolio of companies that generate consistent, sustainable returns on equity. High and stable ROE often reflects a strong, resilient business model—and that’s exactly what long-term investors should be after.