Investor Education Series: Return on Equity (ROE)

When you invest in a company by buying shares of their stock, you are purchasing an ownership stake. The KEY reason why you do so is because you expect the company’s business to do well which ultimately translates to a higher share price. All companies, if given UNLIMITED monetary resources, will be able to turn in a profit at some point in their business cycle. However, the aim is to find companies who are given LIMITED resources and yet can find ways to grow their business and generate profits for themselves. In this article, we will be exploring 1. What is ROE? 2. How do you calculate ROE? 3 What is a good ROE ratio? 4 Which are the factors that could “artificially” impact ROE? 5. What are the variations of ROE? 6. A list of S&P500 companies with strong ROE ratios and 7. A brief look at the ROE valuation method in deriving a “fair value” for a counter....