Return on Equity (ROE) is one of the most widely used valuations on a stock’s investment potential. ROE is the amount of earnings a company produces from dollars invested. Equity is the number of shares outstanding X current stock price.
Example of How to Interprete ROE
Walmart (Symbol: WMT) earned $11 billion dollars for the FY 2006. Take that number and divide it by Walmart’s total equity $53 billion.
$11 billion/$53 Billion = 21% ROE
Usually ratios over 20% are considered attractive. If a company can return its shareholders twenty cents or more for every dollar invested, investors can be reassured that the company is returning wealth to its shareholders.
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When a company’s stock doesn’t reflect it’s true price, ie lower than it should be, is that what you call a value stock?