How to use return on equity to uncover investment opportunities
Return on equity is another important way to analyse a stock.
The ‘equity’ of a business is how much money investors have collectively put into a business.
Companies that have a high return on this figure are the most valuable to own, usually.
You can think about this with your own savings.
Imagine you have $20,000. Would you want it in a bank account that pays 1% or 10%?
Obviously, you want the highest return for your money.
That’s what good companies are able to do. They take money from investors and generate a very high return from it.
You might want to consider companies that have a competitive strength. Something like a government license, a great brand or brilliant management.
One warning: companies can use debt to boost their ‘return on equity’ number. So be careful.
Again, no one metric is the answer.
Filters are simply a way to find a list of ideas to investigate further.
Now let’s look at where profitability factors in…