There are a number of ways to study if a company is making good profits and can be a good investment for online traders. There are a number of factors and financial ratios which give an indication of its profitability but Return on Equity (ROE) is one of the most powerful tools for measuring profitability of a company. It can be calculated by dividing net income by shareholders’ equity as shown below:
Return on Equity = Net Income/Shareholders’ Equity
One important thing to note about ROE is that the net income is considered as the income left after paying dividends to preferred stockholders but before dividends are paid to common stockholders. Shareholders’ equity is also considered without including preferred shares. Shareholders’ equity is the difference between total assets and total liabilities on any balance sheet. Basically, ROE seeks to estimate the profits made on the funds raised through selling of shares.
Return on Equity = Net Income/Shareholders’ Equity
One important thing to note about ROE is that the net income is considered as the income left after paying dividends to preferred stockholders but before dividends are paid to common stockholders. Shareholders’ equity is also considered without including preferred shares. Shareholders’ equity is the difference between total assets and total liabilities on any balance sheet. Basically, ROE seeks to estimate the profits made on the funds raised through selling of shares.
Stock market investors calculate it in slightly different ways as well. In one alternative method, net income is divided by average shareholders’ equity. This average shareholders’ equity may be calculated by adding up shareholders’ equity at the starting of a specific period and at the end of that period and then dividing the result by two. In another method, ROE can be individually calculated for the beginning and end of a period by using shareholders’ equity for that point of time and then compare these two figures to study the change in profitability over a period.
Typically, companies growing at a fast pace can have an increasing ROE over the years. A higher ROE usually indicates a distinct competitive advantage and using five-year average of ROEs for a company can give a good idea of the direction it is headed in terms of profit-making. However, ROE is not a foolproof method to judge the profitability of a company and related factors must also be considered if the figure represents real profits or not. With a balanced view of the fundamentals and a higher ROE, a company can represent good investment option for stock traders and investors. For more details to buy stocks visit our website http://www.ashlaronline.com/
Typically, companies growing at a fast pace can have an increasing ROE over the years. A higher ROE usually indicates a distinct competitive advantage and using five-year average of ROEs for a company can give a good idea of the direction it is headed in terms of profit-making. However, ROE is not a foolproof method to judge the profitability of a company and related factors must also be considered if the figure represents real profits or not. With a balanced view of the fundamentals and a higher ROE, a company can represent good investment option for stock traders and investors. For more details to buy stocks visit our website http://www.ashlaronline.com/