Saturday, June 02, 2012

Using Return on Equity (ROE) to Analyze Stock

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

  1. 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.
  2. 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.
  3. 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%
Google 18.8% 20.0% N/A
Apple 40.0% 30.0% 22.5%
Microsoft 43.8% 44.0% 34.0%


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:

zolar said...

great.. it is good to learn about ROE.

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