Return on Equity
A publicly traded company (any company that issues shares to the public) is owned by its shareholders. The entire company’s holdings is called shareholders equity (total assets - total liabilities). Return on equity calculates the amount of profit for every $1 the shareholders invested.
How to use return on equity
- Higher is better
- Above 15%-20% is considered healthy (always use industry average)
- Can be very different between industries
- Can be used to compare companies
Why do investors use return on equity in their analysis
To find out the owner's attidue toward their company.
Things to be aware of
- Only compare with other companies in the same industry
- Does not include intangible assets (non physical assets like licences, computer software, etc.)
- Equity, stockholders equity and shareholders equity refer to the same thing
- Liabilities should not be more than three times return on equity
The three steps every investor should look at:
- What is the current return on equity?
- What is the long term trend?
- How does it compare to the industry?
How to calculate return on equity
- Return on equity = net profit / shareholders equity * 100%
A negative shareholder equity is a warning sign. It means the company has more liabilities than assets. It might also mean that the owners did not invest enough money or they are taking money out of the business. Don’t stare too much at lower numbers. $0,06 does not seem much but this totally depends on the industry and other factors. You should always compare these numbers with other companies in the same industry.
I already calculated the return on equity for each company and compared them with the industry average. Use the search bar on top, fill in your favorite company and find out how they perform.
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