ROE – not the fish eggs

ROE or ‘Return on Equity’ is a measure that financial analysts use to measure the financial performance of an investment by dividing the net income of a business by the total shareholders equity. It is used to help gauge how efficient a company is in generating profits. The higher the ROE, the more efficient a company is at generating income and growth from its equity.

But why do we worry about how efficient a company is? If they are making money and growing, do I mind if they are not efficient? Well, in the past it hasn’t mattered too much as the global economy was booming with the last decade and half, being one of the best times for financial markets. However, as investors are tightening their belts, with fears of market down turns and recession, they are looking back to ROE to help them determine which companies will succeed in tough times because they have efficient practices.

Companies that typically have high ROE are the ‘value’ type of companies. Think supermarkets, banks, miners, health care and top industrial players. You usually won’t find high growth investments like buy-now-pay-later companies or tech companies in the high ROE space. Is that to say that we should change all of our investments to only have high ROE stocks? No, not necessarily. It is important to have mixed bag of investments within your portfolio including tech and other growth assets.

ROE is simply a measure that can be used to find healthy investments that may perform better during tough times in the market than other investments. Use of ROE analysis along with other investment methodologies can help ensure good, consistent long term growth.

Written by Ashton Cramond