Financial Rankings: Find the Best Companies by ROE & EPS

Concepts

How Is a Financial Ranking Different from a Stock Price Ranking?

A stock price ranking shows market "popularity" -- who's rallied the most, who has the highest trading volume. But popularity doesn't always equal quality. A financial ranking reveals a company's "fundamentals" -- who is the most profitable, who has the strongest balance sheet. Stock prices can be driven by speculation in the short term, but financial numbers are much harder to fake (though not impossible). That makes financial rankings better suited for finding long-term investment candidates.

Five Key Financial Metrics Explained

ROE (Return on Equity)

ROE is one of Warren Buffett's favorite metrics. It measures how much profit a company generates for every dollar of shareholder equity. An ROE of 15% means that for every $100 shareholders invest, the company earns $15 per year.

A higher ROE means the company is better at generating returns for shareholders. But beware -- some companies have high ROE because they are heavily leveraged (amplifying returns with borrowed money). That kind of high ROE is lower quality. It's best to check ROA alongside ROE.

Generally, a company that consistently maintains an ROE above 15% is considered quite strong.

ROA (Return on Assets)

ROA measures how much profit a company generates from its total assets (both shareholder equity and borrowed funds). ROA helps you assess the quality of ROE: if ROE is high but ROA is low, the company is propping up returns with high leverage -- riskier. If both ROE and ROA are high, the company is genuinely well-managed.

EPS (Earnings Per Share)

EPS is net income divided by the number of shares outstanding -- it represents how much each share earned for you. EPS is the most direct driver of stock prices -- over the long run, stock prices follow EPS.

When looking at EPS rankings, don't just focus on the absolute number; pay attention to growth. A company whose EPS grows from $5 to $8 may be more attractive than one with a steady EPS of $10.

Cash Position Ranking

Cash is a company's "ammunition." Cash-rich companies can invest counter-cyclically during downturns, pursue acquisitions, and don't have to worry about liquidity crunches. This is especially important during periods of high economic uncertainty -- companies with more cash are better positioned to weather the storm.

However, too much cash isn't always good either. It may signal that management can't find attractive investment opportunities or is unwilling to return capital to shareholders.

Interest Coverage Ratio

Interest Coverage Ratio = Operating Income / Interest Expense. This metric tells you how many times operating income covers interest payments. A higher number means stronger debt-servicing capacity. If it falls below 1, the company's operating income can't even cover its interest payments -- a dangerous sign.

Generally, an interest coverage ratio above 5 is considered safe, and above 10 is very solid. This metric becomes especially important in a rising-rate environment, as higher rates increase companies' interest burdens.

How to Use Financial Rankings for Stock Picking

Every single metric has blind spots, so a multi-factor screening approach works best. For example: start with the top 20% by ROE, then check which of those have growing EPS, and finally confirm the interest coverage ratio is adequate. This layered screening leaves you with companies that are both fundamentally sound and growing.

Hands-On: Using CTSstock

On the CTSstock homepage (/home), find the "Financial Rankings" section where you can rank stocks by different financial metrics.

Recommended screening workflow:

1. Start with ROE ranking: Identify companies with a consistently high ROE above 15%.
2. Cross-reference EPS ranking: Confirm whether these companies show EPS growth.
3. Check interest coverage ratio: Eliminate companies with weak debt-servicing capacity.
4. Review cash position: In uncertain economic conditions, lean toward cash-rich companies.
5. Click into individual stock pages: Conduct deeper financial analysis and valuation.

This process doesn't guarantee profits, but it significantly reduces the odds of buying a "landmine stock."

FAQ

Q: Is a higher ROE always better? A: Not necessarily. An abnormally high ROE (e.g., above 40%) can sometimes result from very low shareholder equity (perhaps due to accumulated losses eroding book value) or from high leverage. Check ROA alongside ROE to verify quality. Also, the consistency of ROE matters more than a single quarter's high number.

Q: Should I look at quarterly or annual EPS rankings? A: Both. Annual EPS shows overall earnings power, while quarterly EPS reveals the latest trend. The ideal scenario is steadily growing annual EPS with the most recent quarters maintaining that growth momentum.

Q: Financial data is backward-looking -- am I just looking at old information? A: True, financial statements are retrospective and inherently lagging. But their value lies in revealing a company's "constitution." Companies with strong fundamentals are more likely to perform well in the future. Use financial rankings as your first screening step, then supplement with more timely data like monthly revenue and institutional trading activity to offset the lag.