How it works
Return on equity (ROE) measures how much profit a company earns on each dollar shareholders have in the business. A company that earns 20% a year and keeps investing that profit back in grows its value by about 20% a year. That compounding is the engine.
High ROE is easy to fake with debt, though, so we also require liabilities to be no more than 60% of assets. We want companies earning high returns because the business is good, not because they borrowed heavily.
Why it works
Markets consistently underprice durability. Investors are quick to notice that a great business is great, but slow to believe it can stay great for years. Buffett moved from Graham's cigar butts to companies like See's Candies and Coca-Cola because of what he saw there: a business that earns high returns without needing much new capital can compound for decades.1
The track record
- Berkshire Hathaway compounded book value, and later market value, at roughly twice the S&P 500's rate over more than five decades, mostly by owning high-return, conservatively financed businesses.1
- Novy-Marx (2013) found that profitable firms earn significantly higher returns than unprofitable ones, and that profitability works best paired with value — high quality at a low price.2
- Asness, Frazzini & Pedersen, "Quality Minus Junk" (2019) found that profitable, growing, safe companies have beaten "junk" across decades and in 24 countries, and that the market doesn't pay enough extra for quality.3
The catch
- Quality is rarely cheap. This screen doesn't check price. Look at the P/E or earnings yield before buying — or look at the Magic Formula page, which combines the two.
- ROE can be inflated. Buybacks shrink equity and raise ROE. So do one-time gains. Very high numbers (60%+) deserve a second look.
- High returns attract competition. The question is always whether a moat will keep the returns high.
Today's darlings
These are the companies that pass the screen right now, ranked the way the screener ranks them. Figures come straight from each company's SEC filings, updated every night. We filter out obvious data oddities (one-time special dividends, blank-check shells, sub-$50M micro-caps) so the list shows names worth a closer look — not recommendations.
See every match, with the arithmetic
Open the screener with Quality Compounders already selected. Free to use; every row explains exactly why it qualified.
Run the Quality Compounders screen- Berkshire Hathaway shareholder letters, esp. 1989 and 2014 (performance table in each annual report).
- Novy-Marx, "The Other Side of Value: The Gross Profitability Premium," Journal of Financial Economics (2013).
- Asness, Frazzini & Pedersen, "Quality Minus Junk," Review of Accounting Studies (2019).
Educational content, not investment advice. Past performance — of people, papers, or backtests — doesn't guarantee future results. Do your own homework before buying anything.