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Return on Equity Interpretation

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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Comments

  1. Bill says:

    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?

Trackbacks

  1. [...] resources a company utilizes. ROIC is a better indicator of stock quality and strength than Return on Equity because it takes a company’s debt into [...]

  2. [...] in cash and short-term investments. A crisp clean balance sheet complements its mouth watering ROE and ROIC ratios of 28%. Microsoft’s Price-Earnings multiple is also approaching a 5-year low, [...]

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