What is Returns on Equity (ROE) and why is ROE so important? Share Market

 

Today we will know in this blog that what is returns on Equity (ROE)? This post is for you to read this post carefully. Today you can understand how the equity (ROE) plays its role in the stock market.

Returns (ROE) on Equity (ROE), measuring the share holders earned for their investment, it represents the benefit of the company. It shows how well the company has used shareholders. 

The calculation of ROE is divided by the net profit by dividing the net profit. If the company's ROE reduces, it indicates that the company has not used the capitally invested by shareholders.

Generally, if a company has 20% ROE, it is considered a good investment, although the company's reputation is also considered good.

Why is ROE so important?

How profitable for a company is an essential way to return equity to measure it. High values ​​means that the company is earning more efficiently on new investments.

 As an investor, you should learn to investigate and compare the ROE of different companies before making any purchase decision. For those companies, reviewing trends in ROE on time is also a good idea in which you are interested.

Vigilance for all investors This is a word that not only depend on the ROE for investment decisions. The reason for this is that it can be artificially affected by management and therefore the criteria is not the most reliable. For example, when the loan financing is used to reduce the share capital, then the income will also increase ROE.

A good rule to follow for investment is to target those companies whose ROE is similar or more than the competitors. For example, Netco Limited has maintained a stable ROE of 19% compared to the average of 15% in the last few years.

After careful evaluation, an investor will conclude that the management of Netco is better than others, compared to using assets, which contributes to the benefit creation.

What do you tell high ROE companies?

ROE in the stock market is an indicator of the performance and profitability of a company. It has been reported here that you can use this measurement tool to identify whether to invest in a company or not

1.High companies with high ROE know how to use shareholders' money efficiently. If a company can produce high ROE regularly and continuously, investing in such a company is a good idea because due to efficient management of wealth, profit will increase.

2. High ROE companies are good to maintain earnings. He earned intact is a source of capital for any business. When a company retains its earnings and returns it as a working capital, then the need for the loan is eliminated, which means that the company is free from any interest expenses. As an investor, you should keep in mind the expected income of the company each year and examine your return to equity next year. If you see that the company has earned profit and ROE is increasing, it means that the company is creating revenue from earning which has successfully maintained it.

3. High ROE companies have an advantage over their competitors from the meaning of this type that they can protect their long-term benefits and can dominate their market share without any problem. Such companies can generate benefits for long periods and can increase by reinvesting profit to continue the cash flow.

 How to use ROE in ways

To estimate durable development - using ROE, it is possible to determine the durable growth rate and dividend growth rate, provided that the ratio is above average or its equivalent group average. You can soon use ROE to estimate the growth rate of stock and its dividend growth. Compared to these numbers similar to these numbers to reach the appropriate evaluation of the estimated growth rate

Payment of dividends - If you are considering investing in a company, a high ROE can tell you that the company has enough capital to pay shareholders or not. A high return on investment is a reliable indicator that the company has made a better investment of its capital and is earning profit, which can be paid as a dividend to investors.

DuPont Formula - DuPont models are an easy tool to break a company's ROE and to break the factors that resulted in high or low ROOs.

The total profit margin of DuPont Formula Company calculates ROE against sales business against its financial turnover.

Lifetime mathematics has been given here:

ROE (return to equity) = (net income / sales revenue) x (sales revenue) (sales revenue) x (total firm property / shareholder equity)

While using this formula, generally you will get similar results of classic returns on equity approach, but it is more useful for those investors who want to break the company's performance more clearly and the components working in its favor Understand.

Can any company be in ROE negative values?

Yes. A company's ROE may be so low that it comes in a negative number. Generally, investors do not calculate ROE for negative net income firms, because returns to such companies are zero. However, sometimes it happens that the firm has negative shareholder equity due to liabilities, which is more than the property at the time of positive net income returns. Due to the negative shareholder equity near the firm. In such a case, the ROE received by using the formula will be negative value.

It is important to keep in mind that negative ROE does not mean that you should fully defeat the company. However, it should be a warning to proceed with a lot of caution. In the special scenarios, a negative ROE indicates that the company has problems with debt, asset retention or both. Still, even these are not indicators of the guarantee that you should not invest in the company. Negative ROE can be a result of the company's business development initiative. When a company takes an important loan to start an ambitious new project, a negative ROE result will result if the borrowed amount is more than the price.

There is no guarantee in the stock market, so you should be very careful about any decision of your investment. If you think what is returns on equity, with its good understanding, then you have to invest for your benefit can try. You should also keep in mind that any metric can not provide an ideal tool to check the fundamentals. Believe that there is no stupid proof or guaranteed way to tell whether you should invest in a company or not. But one way to do this is unlike the average ROO of five years within a specific industrial area. It will highlight companies with a competitive advantage and who have managed to benefit their shareholders continuously.

Finally, think ROE as a tool that will help you identify industry leaders. If the company has high ROE, then it may be a sign that the company has excellent ability to earn profits. However, it is better to evaluate every aspect of the company before making any investment decision.

What we learned today

Today we learned what is returns on Equity (ROE) and what role in the stock market. I hope you have to post this post and if it is good then you must tell us in the comment box.