Return on Equity:
Measure of how well-organized a company is at making profits.
Is that all there is to "Return on Equity", Could I please get more information.
http://en.wikipedia.org/wiki/Return_on_equity
measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE shows how well a company uses investment funds to generate earnings growth. ROEs between 15% and 20% are considered desirable.
I don't understand.
ROE is equal to a fiscal year's net income (after preferred stock dividends but before common stock dividends) divided by total equity (excluding preferred shares), expressed as a percentage. As with many financial ratios, ROE is best used to compare companies in the same industry.
What is fiscal year, I think its a 12 month period. I don't really understand some bits of the information.
High ROE yields no immediate benefit. Since stock prices are most strongly determined by earnings per share (EPS), you will be paying twice as much (in Price/Book terms) for a 20% ROE company as for a 10% ROE company.
SO basically with a high ROE you cant get good benefits.
The benefit comes from the earnings reinvested in the company at a high ROE rate, which in turn gives the company a high growth rate. The benefit can also come as a dividend on common shares or as a combination of dividends and reinvestment in the company. ROE is presumably irrelevant if the earnings are not reinvested.
HUH?
Of course! Return on Equity (ROE) is indeed a measure of a company's profitability, but it provides more insights into the company's financial performance. ROE is usually expressed as a percentage and is calculated by dividing a company's net income by its shareholders' equity.
Shareholders' equity represents the ownership interest in a company and is calculated by subtracting liabilities from assets. It represents the company's total net worth or book value.
ROE measures how effectively a company utilizes its shareholders' equity to generate profits. It shows the return generated for each dollar of equity invested by the shareholders. A higher ROE generally indicates that the company is more efficient at generating profits.
By analyzing ROE, investors can assess a company's profitability in comparison to its total equity. A higher ROE might suggest a more efficient use of capital, while a lower ROE could indicate that the company is not effectively utilizing its resources.
It is important to note that ROE alone does not give a complete picture of a company's financial health. It should be analyzed in conjunction with other financial metrics, such as profit margins, debt levels, and industry benchmarks, to get a comprehensive understanding of the company's performance.
To calculate the ROE of a company, you need the company's net income and shareholders' equity figures, which can be found in the company's financial statements such as the income statement and balance sheet.