What is ROE (Return on Equity)? A complete guide to the key metric for successful stock investment.

                                                     

       

[Your Investment Compass: How to Read ROE]

       

Hello! For those of you interested in investing, today we will take a closer look at ROE (Return On Equity), one of the most important metrics used to evaluate a company's profitability.

   

   

ROE (Return on Equity): A key metric for judging a company's profitability

        

1. What is ROE?

   

ROE is a metric that shows how much profit a company has generated using its equity. Simply put, it's a measure of how efficiently a company is earning money with the capital invested by shareholders.

                        

ROE Calculation Formula:

   

ROE = (Net Income / Shareholder's Equity) × 100

   

       
• Net Income: The pure profit remaining after a company subtracts all expenses (operating expenses, interest expenses, taxes, etc.) from its total revenue over a certain period.
       
• Shareholder's Equity: The capital invested by shareholders in a company, which is the amount remaining after liabilities are subtracted from assets.
   

   

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2. Why is ROE Important?

   

ROE is a very useful metric for investors to evaluate a company's value and make investment decisions.

   

A high ROE means the company is efficiently using its shareholders' capital to generate high profits. This is also evidence of the company's strong competitiveness and management efficiency. Additionally, companies that consistently maintain a high ROE have great potential to accumulate capital internally and reinvest it for sustained growth.

   

Companies that make a lot of profit have more capacity to pay higher dividends to shareholders. Therefore, a high ROE can also help predict potential dividend income. Finally, by comparing ROE with other companies in the same industry, you can determine which company is being operated more efficiently.

   

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3. How high should ROE be to be considered good?

   

"How high is good" is not an absolute standard, but you can generally refer to the following criteria.

   

       
• 10% or more: This is generally the benchmark for a healthy company. Companies that consistently maintain an ROE of 10% or more can be considered highly attractive investments.
       
• Higher than market interest rates: A company with an ROE higher than the bank savings interest rate can be judged as a worthwhile investment. In other words, investing in the company can expect a better return than putting money in a bank.
       
• Higher than the industry average: It's important to check if the company's ROE is higher than the average ROE of its industry. This is because some industries have a naturally low ROE due to their characteristics.
   

   

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4. Points to consider when analyzing ROE

   

While ROE is a very useful metric, you should not make a judgment based on the number alone. There are a few things to keep in mind.

   

A company's ROE may be temporarily high due to a one-time special gain, such as the sale of real estate. In such cases, you need to check if it maintains a consistently high ROE. Also, since ROE is a metric that looks at profit relative to equity, a company can have a high ROE if it uses excessive debt to reduce its equity and increase profit. Therefore, it's important to analyze it together with the debt-to-equity ratio. Lastly, since each industry has different capital intensity and profit structures, it's more reasonable to compare companies within the same industry.

        

        Key Summary:
        ROE is a key metric for judging a company's profitability, but you should analyze it with other metrics, such as the debt-to-equity ratio, to understand the company's true value.    

   

       

The content of this blog is for reference in making investment decisions, and investment decisions should be made based on individual judgment and responsibility. Under no circumstances can the information in this blog be used as legal evidence for investment outcomes.