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High Return on Equity = Good Company???
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ongjeremiah
Member |
01-Mar-2008 18:27
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Generally, ROE is just one metric of analysis. As you have pointed out, the dupont ROE formula decomposes the source of the company's ROE, which is indeed important for us investors to know how sustainable, and "real" the company's bottomline growth is. Your investment philosophy may have contained certain prescriptions on the minimum value of maximum value of certain metrics to qualify the company. For instance, your max value for the equity multiplier, i.e. A/L, etc. So ROE is useful to this extent. In terms of valuation, cash flow is indeed an important aspect to look at, especially for buffett-type investors. |
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Stupidbear
Senior |
21-Feb-2008 11:16
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I'm still learning into this aspect of valuation and analysis. In my opinion, we should always look into their cashflow and be aware of the figures that contribute to the Net Profit. Bearing in mind that there are many legal ways of manipulation, like adjusting closing stock and considering one-off capital sale gains and revaluation gains. In considering the ROE, non capital figures to be taken out of net profit and core businesses income to be analysed. I'm still learning though and if there's something that you wanna point out, you can drop me a msg @ www.bear-analysis.blogspot.com =D |
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ltvalue
Senior |
21-Feb-2008 11:07
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Buffett and numerous other fund managers often say that high ROE is one of the best indicator of a good company. And while reading annual reports in Singapore, most companies will draw readers to their increased ROE and claim that it is a great accomplishment. Let's do a little exercise first, ROE = Net Profit / Shareholder's Equity = (Net Profit / Sales) x (Sales / Total Assets) x (Assets / Equity) = Net profit margin x Asset turnover x Leverage Company can increase ROE by increase any of the three components. And normally, it would be better if it is boosted by increase in the first 2 components. However, i realise that upon closer reading, some companies are actually increasing their leverage to 'improve' ROE. Furthermore, many of the Net profit recorded are profit that is non-cash, for example, gain on revaluation. So i was just wondering how valid is ROE as an indicator of a great company? |
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