Return on equity (ROE), a measure of profitability in relation to the equity in a business, is another popular metric that can mislead investors. From its reliance on accounting earnings to its susceptibility to manipulation (often to benefit executive compensation), ROE lacks the necessary analytical rigor to support diligent investment decisions. Investors that rely on ROE are in the Danger Zone. Unattractive Stocks with Misleading “Profitability” For a number of reasons that we’ll discuss below, ROE can make companies appear much more profitable than they truly are. Figure 1 highlights the five Unattractive-or-worse rated stocks with the most misleading ROEs in

James Gorman is rubbing Goldman Sachs’ nose in it. Morgan Stanley’s chief executive didn’t just hit his return target with a $1.8 billion first-quarter earnings showing. His fixed-income, currency and commodities traders virtually doubled their top line from what was a tough period for the industry last year, confirming that their chief rival made a mess of the first three months of the year. Morgan Stanley’s 96 percent jump in fixed-income trading was easily the best of the batch of Wall Street’s bulge-bracket results. Bank of America, Citi and JPMorgan each boosted their comparable division’s revenue just shy of a fifth, which

Goldman Sachs’ internal technology revolution cannot come soon enough. The $90 billion Wall Street firm’s young online retail-banking unit is growing and could, once big enough, crank out far higher returns than the investment bank. Goldman could do with some of that extra juice already. At 11.4 percent, Goldman’s annualized return on equity for the quarter places it in the upper echelons of the industry, along with the likes of JPMorgan and Wells Fargo. The trouble is, the ROE depended upon a low tax rate, which followed from a new accounting rule relating to the settlement of share awards. Without