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Return on equity is net income divided by shareholder equity. "It's a very powerful measure of profitability," says Robert McIver, managing director at Jensen Investment Management and a portfolio manager of the $5 billion Jensen Quality Growth fund. "High return on equity over a long period of time, to us at Jensen, we believe is indicative of a really strong company that's able to make money in good times and bad."
McIver says PepsiCo, one of his firm's holdings, is a strong example of a high RoE company. It has a strong business model with 19 brands and over a billion dollars of sales every year and a lot of free cash flow. "Most people think of it as a carbonated drinks company, but it's so much more."