A better-than-expected first-quarter GDP estimate and U.S. dollar strength led the Fed Chair Janet Yellen to signal an imminent interest rate hike. However, a strengthening U.S. dollar might halt the bullish run of the S&P 500 (SPY) as it could potentially impact the oil market and emerging market assets.

In such a topsy-turvy market, where money can play a key role in surviving carnage, investors look for ‘cash cow’ stocks to milk more cash or profits.

However, singling out cash-rich stocks alone does not make them a solid investment proposition unless they are backed by attractive efficiency ratios like return on equity (ROE). A high ROE ensures that the company is reinvesting its cash at a high rate of return.

ROE: The Time-Tested Variable

ROE = Net Income/Shareholders’ Equity

ROE helps investors distinguish between profit-generating companies from profit burners. In other words, this financial metric enables investors to identify those stocks that diligently deploy cash for higher investor returns instead of piling up the dry powder.

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 growing its profits without investing any new equity capital in the business and portrays management efficiency in rewarding shareholders with attractive risk-adjusted returns.

Screening Parameters to Rake Moolah

In order to shortlist stocks that are cash rich with high ROE, we added Cash Flow greater than $1 billion and ROE greater than X-Industry as our primary screening parameters. However, these are not the ultimate criteria for short listing stocks in a turbulent market. As such, we have added a few additional criteria to arrive at a winning strategy to mint money.  

Price/Cash Flow less than X-Industry: This metric measures how much investors pay for one dollar of free cash flow. A lower ratio indicates that investors need to pay less for a better cash flow generating stock.