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Showing posts from January, 2017

Fundamental analysis: How to analyze and find profitable companies

In the last article we talked about the book value. In this article we are going to talk about profitability ratios of ROE and ROCE. ROE or Return on Equity is calculated as Net Income/Average Shareholders Equity. ROE ratio helps in understanding the company’s earnings performance. It is a measure of Company’s profitability. ROE ratio has to be compared with peers, industry etc to get a better overall perspective. Consistent ROE greater than 15% is considered good. Like with all other valuation metrics this one too suffers from the drawback if used in isolation. High debt on the books of the company and aggressive share buy backs can lower the equity base. A lower denominator means higher ROE .This is where analysis can go wrong. To make more sense of ROE we will have to study the Dupont Analysis. THE DUPONT FORMULA TO CALCULATE ROE As pointed out earlier there are various ways which can be used by the management to increase ROE without any corresponding increase in