Best Stock Picks Must Consider This Important Financial Ratio
Investors are trying their very best to make money in the stock market. But most forget to consider Return on Equity (ROE) quite seriously in their quest to find the best stock picks ever. Let see if ROE worth to be considered. What is ROE? ROE is the investment return that shareholders' fund is getting from the company's profits. It can be calculated as the ratio of company's net profit to the average shareholders' equity. And shareholders' equity is the difference of the assets from its liability, which theoretically is something owned by the shareholders. For example, ROE of 30 per cent shows that every $10 shareholders' fund in the company will generate $3 net profit in return. It can be easily explained as the shareholder's return on investment. Why ROE is important? Look, it is not difficult for the company to achieve the record earnings every year as they can easily earn five per cent return by putting it in cash deposit. However, good management must use the retained earnings for a greater benefit. Besides, the earnings per share growth can be manipulated from the share buybacks. On the other hand, ROE indicates how effective the company's management team is in managing shareholder's money. Great management has proven experience in performing 15 to 25 per cent ROE consistently over time. The higher the ROE, the less amount of money is needed to generate the same amount of profits. Of course you want to invest in a company that can generate $10 million in profits from $50 million fund than the one that can only make $1 million profits from $100 million fund, don't you? Having said that, ROE can be manipulated as well. The company can made up their ROE to the attractive level by distributing dividends to its shareholders. Nevertheless, you can minimize the risk by investing in the company that has consistent high ROE. After all, great investment should have good result consistently right? Zainul is an individual investor who has made 10 to 20% return per year consistently from the stock market. Find out how you can get the same return or even better after learning how to pick good stock, calculate intrinsic value and determine it's margin of safety in http://www.stock-investment-made-easy.com/ Don't forget to subscribe my Easy Stock Tips newsletter and get your FREE ebook in http://www.stock-investment-made-easy.com/easy-stock-tips.html Source: www.articletrader.com
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