Saturday, February 18, 2012

Return on Equity

Misreading ROE can lead to frustration
Return on Equity or "ROE" tells investors how much profit a company is generating from the money that is given to it by its investors.  You can find the ROE for a company by dividing the net income by the average shareholder's equity.

It is important to compare a companies Return on Equity to other companies in its industry.  A companies ROE may be lower if it has a large investment in assets.  This investment may give the company a competitive advantage that will help it out perform other companies and register large returns.  Take ROE into account but do not rely on it solely when analyzing a stock.

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