Tuesday, March 17, 2015 7:52 AM / TheAnalyst
Ratio Analysis as a tool represents a system of financial statement analysis that can serve as a quick indicator of a company’s financial performance in areas such as the company’s efficiency, liquidity, profitability and solvency.
This analysis will help investors, creditors, company management and every other stakeholder understand how well a business is performing and where it needs to improve while it can also help in comparing companies within the same industry.
One of such ratios which investors need to understand is Return on Equity (RoE). It is one of the key ratios every investor, either local or institutional, must look into and understand as it helps to measure the efficiency with which a company utilises its equity capital.
As a ratio, it measures the efficiency of a company at generating profits from every unit in relation to each shareholder equity. In a nutshell, it helps to show how well a company uses investments to generate earnings growth.
Based on what RoE measures, we can have the following takeaways which will help drive the understanding of this valuation metric;
Investors should expect a higher RoE for high growth companies.
Calculating average RoE over a particular period like past 5years can give you a better idea of the historical growth of a company.
The advantage of low ROEs comes from re-investing earnings to aid company growth
The measuring of ROE is useful for comparing the profitability of a company to that of other firms in the same industry
High RoE yields no immediate benefit.
Just like PE ratio, RoE is more useful when compared with other companies in the same industry or sector.
Therefore, we present below top three companies based on RoE in each sectors while we implore readers to click the link below to see the full list of all stocks and their current RoE.