How do you get the return on equity on a stock and how do you interpret that to know whether the stocks?

Question

a good buy and valuation

Answer 1

Return = Net Income (earnings)/Shareholder Equity

But what does this *mean*?
Fundamental accounting equation of the universe:
Assets = debt+equity

This *is* the balance sheet.
Every company in the universe is funded from two souces: Debt and Equity. Equity is the amount of money investors have placed in the company through IPO's or subsequent rounds of financing.

Ok...so you have this lump of assets, partially funded from equity and partially funded from debt.

The Earnings is the amount of excess asset the asset the company generates each year.

so if you have high earnings, and low equity input, what do you have? A very efficient cash "machine". You put in a little asset, and it spews out cash.

ROE = a measure of efficiency of owners equity (the stuff the shareholders put in.
ROA = a measure of efficiency of total assets (debt+equity)

If ROA is better than all other companies, it indicates a "competetive advantage".

If ROE is high it means the cash the owners put in is generating high return rates.

Bottom line is, if you think of a company like a "cash machine" the ROE is an efficiency indicator.You put a little in and get a little out.
If the ROE is high, the asset side will pile up much faster than a comparable company with low ROE.

Its just an indicator...I don't think you can value a stock based on it. Like "something good is going on here...lets take a closer look"

Hope that helps.

Answer 2

Return on equity (ROE) is a essentially a measure of how much company stock contributes to profits. It's calculated by taking the Net Income (Profit or loss) divided by Shareholder Equity.

The HIGHER the figure, the better.

Companies can generate financing through the use of equity (stocks) or debt (bonds). ROE is helpful in determining whether it's profitable and a good idea to use stocks as a means of generating financing.

When it comes to determining whether a stock is a good investment, there are a variety of methods you can use. For example, some use the PE Ratio, which compares stock price to company earnings.