InvestorQ : Can you throw some light on how to interpret the Return on Equity (ROE) from the perspective of an investor?
Deepa Salunkhe made post

Can you throw some light on how to interpret the Return on Equity (ROE) from the perspective of an investor?

Answer
user profile image
Juvina Maggie answered.
1 year ago


Return on equity (ROE) is one of the most important measures of profitability and efficiency for investors. There are 3 basic things that investors need to remember with respect to ROE:

· For a company to be attractive from an investment perspective, the ROE has to be higher than the cost of capital. You can get an approximation of cost of capital by using the basic CAPM method.

· ROE must always be understood with reference to the industry benchmarks. How far the ROE of the company is from its industry benchmarks should be the first trigger to understand whether the stock is undervalued or overvalued in the market.

· ROE trend is very important. Other factors remaining constant, a rising ROE trend is always better and preferable compared to a trend of falling return on equity (ROE). A rising trend of ROE is a better driver of valuations.