What MarketScreener's High-ROE Ranking Actually Filters
MarketScreener has added a new investment-style ranking centred on return on equity (ROE), the classic profitability ratio that measures how much profit a company generates for each euro its shareholders have put in. The list ranks companies by ROE from highest to lowest and keeps only the best-scoring names, on the premise that superior returns on shareholders' capital tend to translate into superior stock-market performance over long holding periods.
ROE is calculated by dividing net income by shareholders' equity. In plain terms, a 30% ROE means that €10,000 of equity produces €3,000 of annual net profit. The metric is widely read as a test of capital allocation: a high ratio suggests management is deploying investors' money into businesses that earn attractive returns, rather than leaving it idle or wasting it.
MarketScreener is upfront about the indicator's limitations. ROE ignores debt, so leverage can make a company's returns look better than they really are. The publisher advises comparing a company's ROE with its own history, with the broader market and with the average for its sector, and stresses that ROE should never be used alone — a balance-sheet review is needed to judge the risks behind the number. The new list is part of this effort: a screen that isolates the best ROE performers so investors can apply the metric consistently.
The decision is underpinned by a body of academic work. MarketScreener cites a Credit Suisse study covering 1965–2015 in which the top fifth of companies by ROE outperformed the bottom fifth by an average of 17% a year, alongside a 2010 study by Greenwald, Kahn, Sonkin and van Biema on US stocks and a series of papers on Taiwan, Europe, India and the US. The consistent finding, the publisher says, is that high-ROE stocks beat their local markets over long periods.
The ROE Evidence Base and the Leverage Blind Spot
What the Studies Show: A Persistent Quality Premium
The pattern the article describes is essentially the 'quality' factor in equity investing: companies that earn high returns on their invested capital tend to stay profitable for longer, because the underlying economics — pricing power, brand, technology or scale — are harder for competitors to attack. The cited research stretches from US data over 1975–2009 to Taiwan, Europe and India, which is what makes the claim credible: a premium that shows up across markets and decades is more likely to reflect a real economic mechanism than a quirk of one exchange.
It is still an average effect. The Credit Suisse figure of roughly 17% a year of outperformance for the top ROE quintile versus the bottom quintile over 1965–2015 is a long-run spread, not a guarantee that a high-ROE portfolio wins every year. In any given quarter, valuation swings and earnings surprises can easily bury the profitability advantage.
Where ROE Misleads: Leverage and Sector Effects
The most serious flaw in ROE as a standalone screen is that it improves when a company borrows more. Debt reduces the equity base in the denominator, so a firm can push its ROE higher simply by taking on leverage, without any genuine improvement in its underlying business. A list ranked purely on ROE therefore risks tilting toward more indebted companies — precisely the ones that look strongest on this metric but carry the most balance-sheet risk.
That is why MarketScreener pairs the screen with the ROCE metric, which includes all sources of financing, and why it insists on a parallel analysis of the balance sheet. Sector differences matter as much as leverage: asset-light businesses and financials typically run structurally higher ROE than capital-intensive manufacturers, so a single cut-off across all industries will favour certain sectors. Comparing a company with its sector average and its own historical ROE, as the publisher itself recommends, is the only way to separate a genuinely efficient operator from one that is simply built differently.
A Filter, Not a Verdict
For all the evidence behind it, the ranking is a screening tool rather than an investment recommendation. The methodology is summarised but not fully specified — the article does not say whether financials or other sectors are excluded, how frequently the list is rebalanced, or how the final 'best values' are selected beyond the ROE sort. Investors who use the list should therefore treat it as the first step in research, not the last word. The difference between a profitable screen and a profitable portfolio is everything that happens after the filter.
How to Use the ROE Screen Without Falling for Leverage
For investors considering the screen, the sensible next steps follow directly from the article's own caveats.
- Use the list as an idea generator, not a portfolio. The publisher's own methodology section says ROE is only half the picture; the other half is what the balance sheet looks like.
- Check the debt side for every company on the list. Since borrowed money inflates ROE, firms that rank first may be the most levered, not the most efficient. A quick look at ROCE — which the article introduces as ROE's 'younger brother' because it includes all funding sources — will show whether strong ROE survives the leverage test.
- Compare each pick against its sector and its own history. The article recommends benchmarking ROE against the sector average and the company's track record; use that as your filter before researching the business.
- Plan for a long horizon. The supporting studies run over periods of 40 to 50 years, and the advantage they document is a long-term one. High-ROE portfolios are for investors who can hold through shorter stretches of underperformance.
- Keep the list's limitations in mind. Its exact selection criteria are not fully disclosed, so treat the screen as one input and fill the gaps with your own analysis.
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