What does it say about a company that has a very high return on equity?
2007-09-20 13:03:29 · 5 answers · asked by bretmichaelsishot 2 in Business & Finance ➔ Investing
you haven't provided enough info to offer a fair assessment. that being said ROE can be very misleading and/or a ruse used by fast talking pitchmen. take an exaggerated example:
equity being what is owned free and clear of debt obligations such as with a piece of real estate...the value may be $1,000,000 but the mortgage(s) could be $999,999 making equity $1.00...if the annual rent collected is $10,000 the ROE would be stunning (10,000% per annum if its not reinvested); yet the revenue would not even service the debt (pay the interest) thusly using ROE would not make a very good bellwether. more often return on investment (ROI) is looked at. in this case with the investment being the 999,999 mortgage the ROI would barely make 1% (this example assume current yield calculations only and assuming no increase or decrease in the underlying value of the mortgaged property.....make sense to you? thusly a company claiming a very high ROE really means very little without seeing the whole balance sheet.
2007-09-20 13:27:45 · answer #1 · answered by mks 2 · 1⤊ 0⤋
That's very good. Means that for the $$ you put in your outcome is very good. It's the return on the worth of the stock.
Return on equity reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. It's calculated by dividing a company's net income by its common shareholders' equity.
2007-09-20 13:08:21 · answer #2 · answered by Pook 5 · 0⤊ 0⤋
It says buy with both hands.
Added:
MKS is very correct. But considering how many unprofitable firms that people are eagerly buying shares in, a high return, which is not his example, on owner's equity means profits. The matter here is more akin to: if book value is $1 per share and the earnings per share are $1, that is 100 percent ROE. Of course actual numbers vary and percentages above 100 are rare but happen. In such situations, I think my original advice was still correct--buy with both hands. At least now you might see wasn't entirely flip with my answer.
2007-09-20 13:11:46 · answer #3 · answered by Rabbit 7 · 1⤊ 0⤋
Think about it, really, it all depends on what kind of company your talking about.
2007-09-20 13:12:07 · answer #4 · answered by ra16297845 3 · 0⤊ 0⤋
They are very profitable.
2007-09-20 13:09:18 · answer #5 · answered by Anonymous · 0⤊ 0⤋