For the question What is ROE in Stock Market? You are in right place. ROE means Return on Equity, is a financial ratio
that measures how well a company uses shareholders’ equity to generate profits.
It’s an important indicator of a company’s profitability and efficiency in the
stock market. Higher ROE indicates better efficiency in profit generation.
👉 Under Standing ROE
Suppose you and your friend both start a company with Rs 1000+1000=2000.
After a year, it was seen that you are get 400 rupees. Then your ROA will be =
20%
👉How to calculate ROE?
ROE= Net Income/Average Shareholder’s Equity*100
Here Net Income means Company’s after
tax Profit. And Average Shareholder’s Equity means
(Financial year Beginning Equity+
Financial year Ending Equity)/2. Because shareholder equity can change
for Buy Back and Dividend.
👉Why ROE ratio is important
Because it indicates you to know
business health and efficiency. As an investor, it helps you find out a
company that will grow your investment amount.
According to great investor Warren
Buffet and Charles Thomas Munger, it is very important to know about ROCE (
Return on Capital Employed) and ROE (Return on Equity), because Its show
Company’s Capital. How company collect their capital- from Loan, Share
Holders or Retain Earning. According to them ROE should always in double digit.
👉Limitation and four fact about ROE
1. You
should compare this ratio with PR means industry’s other players. Because high
profit margin industry- FMGC, Pharmaceutical company which ROE is always high.
And Capital Intensive Industry – Airline, Utilities, Real Estate- which
company’s ROE generally low.
2. company
can manipulate ROE by using Debt. for that you should check Debt to Equity
Ratio, Interest Coverage Ratio to guess about the business.
1. 3. Do not follow
ROE only for a point of time you have follow for a long time. And if we see ROE
is increasing for a long time then it indicates Company has utilizes shareholder’s
equity in a good manner. And in other hand is we see decreasing ROE it means
Company Management use equity in unproductive assets.
2. 4. As an investor
you have to also watch company’s Retain Earning, Retain Earning means after
savings of giving dividend, all expenses, tax. If you see one year Retain
Earning and after that year company’s ROE will be increasing it is good sign.
Company uses that Retain Earning in a good project to enhance profit.
