Using Return on Equity (i.e. ROE) is one of the stock fundamental analysis. It basically tells how good a company manage its assets (i.e. share holder capital) to generate profits. A strong fundamental company should have at least 10% on ROE per annual. Of course, the higher the better.
ROE = Net Profits per Annual / Total Shareholder's Fund
Notes:
- Net profits can get get from the annual report or quarterly report. For quarterly report analysis, you need to get the previous 3 quarter report. It should all based on annual if you talk about return.
- The total shareholder's fund is based on the average highest and lowest price of the stock during the period (e.g. annual) and multiple by the number of shares.
- Just get some online free statistic if you don't want to calculate your own. There are some free statistics of financial ratio that you can get online for a particular stock.
Of course the rule of financial ratio analysis is still the same which you should compare the same industry. So the 10% is just a rule of thumb. If you look at the technology companies such Apple, Google, Intel and Microsoft. They have pretty high ROE and usually is higher than 10%.
| Stock | 1 Year (Median) | 5 Years (Median) | 10 years (Median) |
| Intel | 25.4% | 16.2% | 16.8% |
| 18.8% | 20.0% | N/A | |
| Apple | 40.0% | 30.0% | 22.5% |
| Microsoft | 43.8% | 44.0% | 34.0% |
Source: www.stockup.com
Generally if the ROE is < 5% for a period of at least 5 years, we should be careful on that stock.
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1 Comment:
great.. it is good to learn about ROE.
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