Return on Equity (ROE) - Part 1

Return on Equity (ROE) - Part 1

Return on Equity, also well known as ROE, is a measure of management's ability to generate income from the equity available to it. In general, a ROE of more than 15% is considered good. 

In stock market, we use ROE to valuate a stock's performance. 

The formula:

ROE = Net Income/Average of Total shareholder's equity

Net Income, we can get this number from an Income Statement, whereas Total shareholder's equity is listed in Balance Sheet.

Example 1:

GENTING 

1) Download GENTING 2016 annual report from below link:

http://www.bursamalaysia.com/market/listed-companies/company-announcements/5386673

2) Genting 2016 Annual report Page 61, you could find the Income Statement. The Profit for the financial year 2016 4,531.4 RM million is the Net Income.

3) From Genting 2016 Annual Report, page 63 is the Balance Sheet. Here you can find the Total Equity for 2016 is 65,753.3 RM million, whereas 62,791.1 RM million is for previous year 2015. Therefore the average of Total Equity is (65753.3+62791.1)/2 = 64,272.2 RM million.

4) Now you can calculate the ROE for Genting = 4531.4/64272.2 = 7.05%

5) In other words, Genting earns 7.05 ringgit for every 100 ringgit of the shareholder's equity.

In next chapter, we will discuss more details on the quality of Net Income.