What Is Return on Net Worth?

Return on Equity (ROE), also known as return on equity / return on equity / return on equity / return on equity / return on equity / return on equity, is the percentage of net profit to average shareholder equity , Is the percentage ratio of the company's after-tax profit divided by net assets. This indicator reflects the level of return on shareholders' equity and is used to measure the company's efficiency in using its own capital. The higher the indicator value, the higher the return on investment. This indicator reflects the ability of own capital to obtain net benefits.

Basic Information

Chinese name

Roe

Foreign name

Return on Equity, referred to as ROE ^[1]

Return on equity = Net profit / Net assets

Among them, net profit = profit after tax + profit distribution; net assets = owner's equity + minority shareholders' equity

Of course, if profit is not distributed or there is no business combination, net profit = profit after tax and net assets = owner's equity, then return on net assets = profit after tax

Calculation method

Return on net assets is also called

Return on equity measures the company's

according to

On April 26, 2006

Comparison of the properties of ROE indicators obtained from the two calculation methods:

Fully diluted return on net assets = net profit for the reporting period ÷ net assets at the end of the period-(1)

Comparison of the meanings of the ROE indicators obtained by the two calculation methods:

Due to the different nature of the ROA index obtained by the two calculation methods, their meanings are also different.

The meaning of the indicators calculated in the formula (1) for the calculation of the fully diluted return on net assets is to emphasize the year-end situation, which is a

Calculation options for return on equity indicators:

Because the index of return on net assets is a comprehensive stubborn indicator.

From the perspective of the operator's use of accounting information, weighting should be used

(1) Influencing factors of return on net assets:

The main factors affecting the return on net assets are

First, in the calculation of the return on net assets, the numerator is net profit, and the denominator is net assets. Since the net profit of an enterprise is not only generated by net assets, the caliber of the calculation of the numerator and denominator is not consistent, which is logically unreasonable. .

Second. The return on net assets can reflect the

Over the invisible hurdle

Observe a family

As we all know, the return on net assets is an important indicator for measuring the profitability of listed companies and reflects the profitability of business owners. However, some people have slightly expanded the return on net assets when choosing investment products. They should be considered comprehensively when choosing. Recognize the shortcomings of the return on net assets, and consider the selection of investment products with reference to other indicators.

The return on net assets is calculated as follows: return on net assets (R) = earnings per share or company net profit (E) / net assets per share or company equity (A) × 100%.

First, you should see the flaws in the formula itself. This calculation formula only reflects the value of the return rate, but does not reflect the size of the two numbers of the numerator and denominator. It can be seen from the formula that there are many ways to improve ROE. Among them, the E value is unchanged, the A value is reduced, or E, A Both values decrease at the same time, and the A value decreases more. Both methods can increase the R value, but it is obvious that the decrease of E or A is a sign of the decline of the company's profitability. Therefore, the company cannot be considered solely from the higher value of R itself. High profitability.

Second, because investors have always valued R, it has brought some bad guidance to the market. Taking it as the standard, it is not conducive to the company's stable operation and sustainable development. Some listed companies with poor performance and low net worth, on the one hand, obtain book profits through connected transactions by large shareholders or directly seek subsidy income from local governments to increase On the other hand, due to successive operating losses or repeated transfers of shares, the denominator has become smaller. Once the refinancing funds are available, they can be leveled for large shareholders for free, or they can purchase government bonds or repay loans. Funds were scarce, so corporate development stalled. In addition, the domestic pursuit of R has hindered the internationalization of enterprises. According to international standards, a profitable indicator for judging the operating performance of a company is the return on total assets rather than the return on net assets. Since total assets are equal to the sum of net assets and liabilities, the calculated return on total assets tends to be significantly lower than the return on net assets when the level of returns is constant. If a comprehensive assessment system is not used to evaluate the overall status of the enterprise, the enterprise will be very unsuited to issues such as the rating of international agencies that the company will face in the future, and it will be difficult to correct it and face obsolescence.

In short, when conducting a financial analysis of a company, you can't just consider who has a high return on net assets. Need to study the gross margin, net profit, turnover rate, financial leverage in more detail, find the differences between different companies, study the causes of these differences, and then judge the possible changes in the company based on these things, so as to find safe and reasonable investments opportunity.