What is ROE?
ROE, also known as return on equity, is the percentage of net profit to average shareholders' equity, also known as return on equity, return on equity, and return on equity, which is the percentage rate obtained by dividing the company's after-tax profit by net assets. This indicator reflects the level of income from shareholders' equity, which is used to measure the efficiency of the company's use of its own capital, and reflects the ability of its own capital to obtain net income.
Formula for calculating ROE
There are two common formulas for calculating ROE (Return on Equity):
1.Fully diluted return on equity = net profit for the reporting period Net assets at the end of the period -- applicable to shareholders' examination of return on equity.
2.Weighted average return on equity = net profit in the reporting period Average net assets -- applicable to management's review of return on equity.
Net profit in the reporting period refers to the net profit attributable to ordinary shareholders of the Company, net profit after deducting non-recurring gains and losses; Net assets at the end of the reporting period refer to the net assets belonging to shareholders at the end of the reporting period, including share capital, capital reserve, surplus reserve, undistributed profits, etc.; Average net assets refer to the average net assets during the reporting period, i.e. (net assets at the beginning of the period + net assets at the end of the period) 2.
ROE can also be decomposed into the product of the return on assets and the equity multiplier, i.e., ROE = ROA EM, where ROA is the return on assets and EM is the equity multiplier. This formula illustrates that a company's ROE is affected by its asset utilization efficiency and financial leverage.
The calculation formula of ROE can be selected and processed differently according to different objects and purposes, and it is necessary to select the appropriate formula for calculation and analysis according to the specific situation in practical application.
ROE indicator analysis
The higher the ROE index, the higher the return on the net assets of the enterprise, that is, the greater the ability to increase value; The lower the indicator, the weaker the profitability of the company's owner's equity. This indicator is the main indicator to measure the profitability of listed companies, and it is also an important financial indicator to measure the efficiency of shareholders' capital use.
Analysts interpret ROE as the ability to reinvest a company's earnings to generate more revenue, and it is also a measure of a company's internal financial, marketing and operating performance. Therefore, ROE is also the most important indicator for Warren Buffett when investing in companies, and he calls ROE an all-round indicator because its evolved formula can see a lot of financial realities.
When using ROE indicators to make investment decisions, it is necessary to pay attention to the stability and sustainability of ROE indicators to avoid being misled by short-term financial data.