The broader U.S. equity markets witnessed a solid uptrend yesterday as a better-than-expected inflation reading evoked positive sentiments that inflation is easing, albeit slowly. The Consumer Price Index (CPI) data for December revealed that Core CPI, which excludes volatile food and energy prices, rose 0.2% month over month and 3.2% year over year compared with broad-based expectations of 0.3% and 3.3% increase, respectively. This was the first decline in Core CPI from the past three months’ reading of 3.3%.

Despite signs of decelerating inflationary pressures, the Federal Reserve is widely believed to have kept the interest rates steady in its next policy meeting scheduled to be held by the end of this month. As investors employ a wait-and-see approach in a classic example of “backing and filling” in the market, they can benefit from “cash cow” stocks that garner higher returns.

However, identifying cash-rich stocks alone does not make for a solid investment proposition unless it is backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting cash at a high rate of return. The Walt Disney Company DIS, Leidos Holdings, Inc. LDOS, Raymond James Financial, Inc. RJF, Cencora, Inc. COR and Delta Air Lines, Inc. DAL are some of the stocks with high ROE to profit from.

Why ROE?

ROE = Net Income/Shareholders’ Equity

ROE helps investors distinguish profit-generating companies from profit burners and is useful in determining the financial health of a company. In other words, this financial metric enables investors to identify companies that diligently deploy cash for higher returns.

Moreover, ROE is often used to compare the profitability of a company with other firms in the industry — the higher, the better. It measures how well a company is multiplying its profits without investing new equity capital and portrays management’s efficiency in rewarding shareholders with attractive risk-adjusted returns.

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