A guide for beginners
This parameter helps you gauge how efficiently the company is using the shareholder’s money to generate profits. It is an important indicator for investors to judge a business.
Net profit divided by average shareholder’s equity The higher the RoE, the better a company is. However, criteria for a healthy RoE changes from sector to sector.
1. It can check how the company is utilising the money to grow its business. 2. Comparing RoE of its peers and time periods can show the business’ efficiency (To be cont.)
3. Efficiency of its reinvestments can be measured
1. It doesn’t reflect growing debt 2. Several factors other than core profitability can inflate RoE figures, which can be misleading (to be cont.)
3. One-time gains can drive up RoE, which can be misleading
1. RoE is a reliable indicator to judge a business 2. But it can only be a starting point for further company analysis