Are there any good stock selection indicators that can help solve the stock selection problem? Of course
Today I will introduce ROE, which is a financial indicator that investors should know but not paying
enough attention to. The research found that the stocks bought by Warren Buffett have a common feature, that is, the return on equity is very high.
Return on Equity (ROE) is the index to judge the efficiency of funds in the hands of the localities. By and large, the return on equity be obliged to exceed the bank interest rate the corresponding period.
I believe Everyone once dreamed to run your own business, some even dreamed to become billionaires. If you have a sum of money to invest in a company, how do you make the choice? Or what specific indicators do you value? Obviously, ROE is one of them.
ROE= company's after-tax profit / company’s net assets.
For example, if A wants to run a hotel, the plan is to invest 500,000$ and Loan 500,000$ to financial institutions, that is to say, the investment of 1 million$.
In addition to all costs and expenses, taxes paid, and interest paid to financial institutions, a profit of 100,000$ is left.so, hotel's ROE is 20%, that is, in the year A operates the hotel, A has made 20% of investment as a stockholder.
In the same case, B also runs a hotel. He also invests 500,000$ and loans 500,000$, which is also a total investment of 1 million, after one year's operation, there is still a profit of 50,000$. So, the ROE of B's hotel is 10%.
Through the above example, if you want to make an investment, whose hotel do you choose? It must be A's.
It is worth noting that the higher the ROE, the better, some companies ‘ROE may reach 50%, 60% or more in a certain year, at this time, we should pay attention to the high ROE under some special circumstances, especially when choosing stocks.
Return on equity is generally shown in the balance sheet as return on equity=net profit/net assets, while net assets=total assets – liabilities. This formula means that if the company's liabilities increase, the net assets will decrease and the return on net assets will increase. Such stocks will be deceptive at some time.
So, if you see a significant increase in the return on equity of a company in a certain year, you should pay attention to whether it is caused by the increase in the debt ratio. In addition, when selecting stocks based on the "return on equity", we must select the return on equity that remains stable and high throughout the year. Therefore, you can select several stocks with ROE>15% for more than three consecutive years to add to your self-selected stocks, and select the final investment target among these stocks. This will greatly narrow the scope of stock selection and offer you clear chances to win.