Return on Equity (#ROE) and Return on Capital Employed (#ROCE) are two important Financial Ratios used in #FundamentalAnalysis of Stocks.
#StockMarket #Investing
Thread 🧵explaining #ROE & #ROCE and its use in #FundamentalAnalysis
(Must read for #FA learners)
🙏Like & RT to spread learning with all 🙏
Views Welcome 👉 @dmuthuk @Vivek_Investor @datta_arvind @caniravkaria @FI_InvestIndia @AdityaD_Shah
#FundamentalAnalysis #StockMarket
Return on Equity (#ROE) and Return on Capital Employed (#ROCE) are two important Financial Ratios used in #FundamentalAnalysis of Stocks.
#StockMarket #Investing
Return on Equity (ROE) is the ratio of Net Income (Net Profit) of a company and it’s Total Equity (Shareholder's Equity).
Here - Shareholders Equity = Share Capital + Reserves & Surplus.
#StockMarket #Investing #FundamentalAnalysis
#ROE is a measure of how much net profit a company is making for every rupee invested by its shareholders in the company.
It can be said that higher the ROE, better it is for the equity shareholders. It tells shareholders about how effectively their money is being used.
However, you should not trust high ROE blindly. Biggest drawbacks or weaknesses of ROE is that it completely ignores debt.
Hence for companies having high levels of debt, ROE will give a higher but misleading value & therefore we need to look at #ROCE along with #ROE.
Return on Capital Employed is ratio of company’s Operating Profit i.e., Profit before Interest & Taxes (EBIT) and its Total Capital Employed.
Here - Total Capital Employed = Shareholder’s Equity + Short Term Debt + Long Term Debt
#StockMarket #Investing #FundamentalAnalysis
Since #ROCE measures how much profit a company generates with its total capital employed, it overcomes a major weakness of ROE.
It can be said that higher the ROCE, the better it is. It means that business is profitable & company is utilizing its capital more economically.
ROCE is a long term profitability ratio because it shows how effectively company’s assets are performing while taking into consideration long term financing.
This is why ROCE is a more useful ratio than ROE to evaluate the longevity of a company.
#StockMarket #Investing
@WarrenBuffett prefers to invest in companies which have both #ROE and #ROCE above 20%.
✅He also prefers that value of ROE and ROCE should be close to each other.
❎He avoids investing in companies where there is a large difference between ROE and ROCE.
More from Techno Funda Investing
More from Accounting
Accounting is the language of business.
10 threads that will teach you more about accounting than any accounting degree:
1/ Who: @10kdiver
What: Understand the balance
2/ Who: @SoulFairy3
What: Income statement
3/ Who: @BrianFeroldi
What: Income statement
4/ Who: @AliTheCFO
What: Profit vs cash
10 threads that will teach you more about accounting than any accounting degree:
1/ Who: @10kdiver
What: Understand the balance
1/
— 10-K Diver (@10kdiver) February 5, 2022
Get a cup of coffee.
In this thread, I'll show you how to read and understand a company's Balance Sheet.
As investors, we should be able to judge businesses by looking at their financial statements.
And the Balance Sheet, of course, is 1 of 3 key financial statements: pic.twitter.com/6D0HA0vmEN
2/ Who: @SoulFairy3
What: Income statement
Many new investors are scared of financial statements. I don't blame them. Us accountants complicate the simplest things to keep ourselves employed\U0001f602
— Soul \U0001f4da (@SoulFairy3) December 6, 2021
Let me show you guys the Income Statement first. You honestly just need 3 numbers. Trus bob\U0001f483
Short \U0001f9f5
3/ Who: @BrianFeroldi
What: Income statement
Accounting is the language of business.
— Brian Feroldi (\U0001f9e0,\U0001f4c8) (@BrianFeroldi) July 28, 2021
If you buy stocks, you MUST learn how to read an income statement
Here\u2019s everything you need to know:
4/ Who: @AliTheCFO
What: Profit vs cash
Most founders don\u2019t understand the difference between PROFIT and CASH FLOW
— Ali Ladha (@AliTheCFO) November 2, 2021
Not knowing this difference, could leave your business without cash and push you into bankruptcy
Here are the key differences between PROFIT and CASH FLOW
//A THREAD//
