Hello friends, today we will know about the (ROE) ratio. This (ROE) ratio is very important for fundamental analysis. We must always look at the ROE ratio before buying any stock. (ROE) ratio is the full form (Return on equity) that is, how much percentage of the company is making money in a year with the money of equity. for better understanding give me a question answer?
1. The company (AB) which costs 1 lakh and the company generated profit 50 thousand annual.
2. The company whose value is 1 lakh and the company is giving you 5 thousand rupees per year.
Which company would you like to buy?
Obviously, all would like to purchase AB because this company is making more money. So the higher the ROE ratio, the better.
How to calculate (ROE) ratio?
To calculate (ROE) ratio, you will have to divide the company’s net income by the shareholder equity.
For example (AB) company’s NET INCOME / SHAREHOLDER EQUITY – 100000/50000 = 2 This company’s ROE ratio turned out to be 200%.
The company’s (ROE) ratio should be at least 15% and the higher the better.
If the company’s Return on equity less than 5% then you should avoid buying such a company.
Return on equity is a small part of fundamental analysis. You have to more things before buying a stock.