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  • Category: Miscellaneous

    Important for equity investors: Return on Equity (RoE)

    The investors who invest in direct equities, select stock(s) on the basis of certain ratios. One of such ratios in Return on Equity (RoE). It is important to know about this ratio, because proper understanding of the concept of RoE would help us to selct stock in future.

    RoE of a company is a profitability measure which calculates how much profit a company has made on the money that the share-holders have invested in that particular company. RoE is expressed in percentage terms and is derived by dividing Profit After Tax (PAT) by shareholders' equity. RoE also measures the efficiency of a particular company indicating how well the company's management is deploying the shareholders' capital. A rising RoE suggests that a company is increasing its ability to generate profit without needing additional capital. Generally an increasing RoE is good for the shareholders. However, it should be remembered by the investors that write-downs, buy-backs and high level of debt reduce the value of the shareholders' equity which consequently leads to an artificial increase in RoE.
  • #598300
    Good information Partha sir. In fact, it is the first ratio I generally look into before investing in any stock. I generally try to avoid those shares, whose RoE is less than 20. As you said, I also look into whether the RoE increases every year or not and see whether it is not increasing due to debt.

  • #598301
    We have to see whether RoE is increasing because of increase of profit after tax or reduction in equity. If we keep this point in mind we can make out a correct assessment of the growth of a company.

    The information is very useful for persons investing in equity market.

    Knowledge is power.

  • #598313
    Sincere thanks to Mr. Nalla and Mr. Umesh for significant value-addition to this thread. Earlier I had some doubt whether this thread would be read by the Members, or not. Now I know that at least two Members have read this and found the subject useful.
    Caution: Explosive. Handle with care.

  • #598316
    While I do agree that return of equity is the basis for deciding factor for investors, one must understand that even after some profit making ability there are other forces for which the company has to make provisions and thus the profit margin may not be the same for every year. Now a days the purchasing power of the people is varying and brand loyalty is shifting , in that case basing on the past performance of a particular company cannot be taken as yard stick. However certain brands which are having long standing in the market can be believed and their stock can be relied upon for investment.
    K Mohan
    'Idhuvum Kadandhu Pogum "
    Even this challenging situation would ease

  • #598344
    A good information from Mr.Partha. A useful thread. When we are going to invest in equities of a company we should look into the health of the company. What was the performance of the company last 5 years. What was the history of dividends payment. How much % dividend they were paying in the last 5 years. Was there any increase in profit after tax during last five years. These are the points one should check before investing. Personally when I want to invest in equities I will also look for the performance of competitors in the same field also. A useful tip.
    drrao
    always confident


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