ROE (Return on Equity) is one of the indicators used by stock market investors to analyze stocks. Indicates the management's ability to transform the invested capital into profit. The higher the ROE, the more the company is able to create money with the same capital invested.
Steps
Step 1. Calculate the Net Equity (PN) by subtracting the Total Liabilities (TP) from the Total Investments (TI)
(PN = TI - TP), or alternatively Share Capital + Secondary Interest + reserves and profits = PN.
Step 2. Calculate the average equity from the beginning (PN1) to the end (PN2) of the year:
(PNmed = (PN1 + PN2) / 2).
Step 3. Find the Net Profit (UN) represented in the company's official balance sheet
Step 4. The ROE is calculated by dividing the net profit by the average net worth:
(ROE = UN / PNmed).
Advice
- Companies with a ROE between 15 and 25% are absolutely exceptional cases.
- Companies that have a ROE of less than 5% should be avoided.