What Return on Equity Tells Investors — and What It Hides

MarketScreener has rolled out an investment-style list that ranks stocks by return on equity (ROE), updated daily by its algorithms. ROE is calculated by dividing a company's net profit by the equity its shareholders have invested, and is expressed as a percentage. A reading of 30% means that €10,000 in shareholder funds generates €3,000 in net profit.

The metric has a close relative: ROCE, or return on capital employed, which also counts debt as part of the capital base. ROE deliberately ignores borrowings, and that is both its strength and its weakness. As the publisher itself warns, a company can take on debt and push its ROE higher through a leverage effect that flatters profitability without improving the underlying business. For that reason, ROE is only meaningful when compared with a company's own history, the average for its sector and the broader market — and when read alongside a balance-sheet analysis.

The list rests on a long-run performance claim: companies with the best return on equity have historically outperformed their markets. Evidence cited includes a Credit Suisse study covering 1965–2015 and academic research spanning markets in the United States, Europe, Taiwan and India. The publisher presents the list as a starting point for stock selection, not a recommendation, and notes that past performance is no guide to future results.

What 50 Years of Data Say About ROE as a Stock Filter

What the Research Actually Shows

The core evidence is a Credit Suisse study of the period 1965–2015, which the article says found that the 20% of companies with the highest ROE outperformed the 20% with the lowest by an average of 17% per year. That claim is broadened by academic work cited across multiple markets: Greenwald, Kahn, Sonkin and van Biema (2010) on US stocks between 1975 and 2009, plus studies of Taiwan, Europe, India and the US published between 2014 and 2021. If accurate, this is an unusually wide evidence base for a single screening criterion — the pattern reportedly holds across geographies and decades, which is what gives the ROE screen its credibility.

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Why ROE Works as a Quality Proxy — and Where It Breaks

High, stable ROE is generally a signature of durable competitive advantages: pricing power, efficient use of assets and strong brands. That makes ROE a practical proxy for the quality factor that academic finance has long associated with market-beating returns. The flaw sits in the formula itself. Because ROE ignores liabilities, a company can inflate the number simply by borrowing more — the leverage effect the publisher flags. A screen that takes ROE at face value will therefore reward debt-fuelled balance sheets as readily as genuinely efficient ones, which is why the source insists that debt and balance-sheet analysis run in parallel with any ROE rank.

A Product, Not Just a Lesson

The explainer doubles as marketing for MarketScreener's daily-updated list, and the exact screening methodology beyond ROE ranking is not disclosed. That does not undermine the underlying research, but it matters for how the list should be read: as a convenient filter generated by an algorithm, not as a researched stock recommendation.

How to Use an ROE Screen Without Falling for Leverage Traps

For investors who want to use ROE as a stock filter, the article's own caveats translate into a short checklist:

  • Pair the screen with debt checks: because leverage can artificially inflate ROE, the publisher advises a balance-sheet analysis alongside any high-ROE candidate.
  • Benchmark before believing: compare a company's ROE with its own history, its sector average and the market — the source states a raw ROE figure cannot be analysed on its own.
  • Prefer stable outperformers: Greenwald et al. (2010) found that high and stable ROE tends to beat the market, while low and volatile ROE tends to underperform — favour consistency over spikes.
  • Think in decades, not weeks: the outperformance evidence runs from 1965 to 2015 in the Credit Suisse study, making ROE a long-term filter rather than a timing tool.
  • Verify the underlying data: the list is generated daily by algorithms, and the full screening criteria are not disclosed, so confirm fundamentals directly before acting.