What Is Return on Shareholders Equity?

Return on Equity (ROE for short) is a measure of stock investor returns. It also evaluates the performance of corporate managementprofitability, asset management and financial control.

Return on equity

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Return on Equity (ROE for short) is a measure

If the company you are concerned about has a low return on equity, then it is likely to be a commodity company. The average return on shareholders' equity of a US company is about 12%. If it is lower than this figure, it means that the company has a poor economic situation due to commodity products and pricing. Buffett believes that companies with low returns on shareholders' equity will not be able to maintain prosperity for a long time.

Warren Buffett likes to find companies that have a sustainable competitive advantage, and his competitors are difficult to compete with. Regarding companies with such advantages, they usually have a common mark, which is a higher ROE. Warren Buffett once said that a successful stock investment depends on whether the company's basic business has the ability to continue to generate income growth, because the company's profits will increase over time, and the company's stock price will reflect the company's internal As the value continues to rise, ROE is a good monitoring indicator. One of the conditions in Buffett's stock selection model is to find companies with an average ROE greater than 12%.

To analyze the ROE of the target stock, you must first compare it with the company's ROE in order to understand the stability, development trend, and whether the ROE of the target stock can continue to be at a high level. On the other hand, it is also necessary to compare the ROE of the target stock with other competitors and industry averages, so as to understand how the ROE of the target stock is positioned and competitive in the industry.