Understanding ROE, ROCE and Shareholder's Equity

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Return on Equity (Return on Net worth)

Return on Equity (ROE), also called as Return on Net Worth, is one of the key financial ratios which indicates how well the management has been efficient in managing the company's assets. In my early days in the investing world, this is the ratio which confused me the most. Return on Equity is defined by the following formula


What is confusing in the above formula for beginners is the meaning of 'Shareholder's equity'. Shareholder's equity should not be confused with 'total value of all the equities, i.e. shares'. The later is called market capitalization of the company. Shareholder's equity is defined by

Shareholder's equity = Total Assets - Total Liability

In other words, Shareholder's equity is nothing but the amount of money that the company would be worth if it were to go bankrupt at this very moment. This is also called as book value.

How to calculate ROE?

In order to calculate ROE, Return on Equity, lookup any financial portal or the company's annual report for the following

1. EPS - the earning per share of the company.
2. Book Value - The book value of the company per share (i.e. shareholder's equity divided by the number of shares).

Then to calculate ROE you simply divide EPS by Book Value. ROE is typically expressed as a percentage (i.e. multiply by 100 and put a "%" sign).

Example of Return on Equity : Let us say a company earns Rs. 100 per share and the book value of the company is Rs. 300. Then the Return on equity is 33.3%.

Typical values of Return on Equity and what it means

As a general rule of thumb, you should be careful while investing in any company whose ROE is less than 10%. I personally prefer stocks which give a return on equity of at least 20% or more. Obviously return on equity is a direct measure of how well the company is generating cash with the amount of 'shareholder's money' it has. There is one more thing which ROE tells you and which most financial websites don't mention. ROE also tells you how easy it is for the company to profitably expand its business. For example, let us take a situation where the company does not have any debt. Then an ROE of 25% means that the company is producing Rs. 25 for every Rs. 100 of assets it has. Thus if the company were to expand its business, then for every Rs. 100 spent on expansion, it would earn Rs. 25, which is greater than the usual interest rates. If ROE is roughly the same as the bank interest rates, then it means that even if the company expands, it will take a long time for it to make its investments in expansion profitable.

Variations: Return on Average Equity

The Book Value of a company can significantly change during a given year. In these circumstances, one can calculate the average book value (average of the book value in the beginning of the year and at the end of the year) and use it to calculate ROE.

What ROE does not tell you

ROE, like any other financial ratio is very far from being perfect. For example, ROE does not tell you anything about the debt of the company. As explained before it does say something about the potential of the company to expand its business, but does not actually tell you anything about the possible or expected growth of the company. Nevertheless, ROE is a very basic ratio, and used in addition with few other indicators like topline growth and financial ratios like P/E, Debt/Equity and profit margins can give a reasonable good and quick overview of the company.

ROE versus ROCE

A related ratio to Return on Equity is Return on Capital Employed (ROCE) or also called by the name of Return on Capital Invested (ROCI). ROCE is defined to be

ROCE = Operating Profit / Capital Employed.

Operating Profit means profit before tax, depreciation, interest and exceptional items. While Capital Employed is the cash (& assets) that was actually used to do the business in that year. The formula for calculating Capital Employed is

Capital Employed = Total Assets - Current Liabilities

Note that Current Liabilities are those liabilities which the company has to meet immediately (in the coming year). ROCE can sometimes give a slightly accurate picture than ROE, but I have found that overall if you look at the values of ROE for the past 5 years, you get roughly the same picture of the company as you would get by looking at values of ROCE. Moreover, ROE is easier to calculate.

Related Posts on Financial concepts and Investment Basics Understanding the P/E Ratio Return on Equity (ROE), ROCE and Shareholder's Equity Consolidated results vs. Standalone Results. Topline Growth vs Bottomline Growth

SVCC or Sitamma Vakitlo Sirimalle chettu

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 I recall reading some lines in Yandamuri. Real happyness is like godavari, slow but steady, calm and forever. Gratification due to some other material reasons are like a brook or creek, Like a surge but goes to zero pretty fast.

Some of my friends used to compare this with Ilayaraja mustic vs A.R.Rahman music. Many of the Ilayaraja songs are alive today across generations. But those instant successes from A.R were forgotten (though A.R gave wonderful melodies).

The movie, SVCC is quite similar to the above if we compare this with Dookudu or Pokiri. It is going to be an evergreen movie for Sankranti. There are no sumo blasts, or talks about vamsam (lineage) or skin show or songs shot in expensive sets or foreign locations, and no routing comedy.

It is a simple, middle class drama which we all have experienced at some part of our life. Be it as a son or brother or dad or wife, sister, mom.

Appreciation must go to the entire team but especially to the Director who made this happened. Great job.

PHB'arian Definitions - Skill set required to be in Singapore ;)

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If you guys don't know what is PHB, you are not a qualified Engineer. Anyway below are some good lines of examples. What will happen if a nerd-to-be is in charge of writing stuff. No wonder this is owned by Government :)

• Enterprise Architect traits/skills

• Sound technical knowledge of network architecture and object-oriented analysis and design

•  Engineer (Network Planning / Design)

An Engineer (Network Planning/Design) should have a good understanding of network operating systems such as voice-over-IP (VoIP) technologies and network management systems such as HP Openview, IBM Tivoli etc. The engineer should be familiar with network, security, wired and wireless LAN and routing technologies solutions from CISCO, Alcatel etc. 

• Project Managers

Project Managers should also possess:
• Ability to lead by example and a hands-on approach to problem solving 

• IT Manager

The IT Manager should possess the following:

• Ability to perceive and understand the client (internal) requirements
• Ability to accept more responsibilities as the job scope increases to keep pace with the growth in the business 

Idiocracy Movie - Guess the movie predicted the evolution. Atleast that's what I can feel

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Wikipedia link

As shown in the movie, I don't think it needed 500 years but less than 5 years.

Why so much hatred towards people? Why people simply focus on rewards, entitlements but conveniently forget responsibilities?
Be it our friends in SG who doesn't want to see foreign workers here but want all the cheap labor; invest in all those third world countries so we can get dividends back.

Or the americans, or russians, Indians, Chinese. Whoever it is the attitude seams the same to me. Why can't we simply live and let live? Why ???

Today, I've seen one of my old friend who is working with with an american company, covering the region as sales head (e.g. India, Indon, Philippines etc). He was sharing his views on the immigration and for the simplicity sake, I can summarize his view. Don't give PR to any of them; Don't letem buy property here. Must rent from Singaporeans; Tax them higher compared to locals; No public schools to their children; Let them go to private hospitals. The point is at an individual level what would happen if the same thing happens to him.

Imagine, the Indonesians or Philippines firms reply with the same? If the US based company says the same, i.e. less pay compared to an american; less annual leaves; more working hours etc. What would be his reaction? I've no idea thanks to the established policies from HR/Companies. But what it would be to get in to that situation?

Understanding ROE, ROCE and Shareholder's Equity

To contact us Click HERE

Return on Equity (Return on Net worth)

Return on Equity (ROE), also called as Return on Net Worth, is one of the key financial ratios which indicates how well the management has been efficient in managing the company's assets. In my early days in the investing world, this is the ratio which confused me the most. Return on Equity is defined by the following formula


What is confusing in the above formula for beginners is the meaning of 'Shareholder's equity'. Shareholder's equity should not be confused with 'total value of all the equities, i.e. shares'. The later is called market capitalization of the company. Shareholder's equity is defined by

Shareholder's equity = Total Assets - Total Liability

In other words, Shareholder's equity is nothing but the amount of money that the company would be worth if it were to go bankrupt at this very moment. This is also called as book value.

How to calculate ROE?

In order to calculate ROE, Return on Equity, lookup any financial portal or the company's annual report for the following

1. EPS - the earning per share of the company.
2. Book Value - The book value of the company per share (i.e. shareholder's equity divided by the number of shares).

Then to calculate ROE you simply divide EPS by Book Value. ROE is typically expressed as a percentage (i.e. multiply by 100 and put a "%" sign).

Example of Return on Equity : Let us say a company earns Rs. 100 per share and the book value of the company is Rs. 300. Then the Return on equity is 33.3%.

Typical values of Return on Equity and what it means

As a general rule of thumb, you should be careful while investing in any company whose ROE is less than 10%. I personally prefer stocks which give a return on equity of at least 20% or more. Obviously return on equity is a direct measure of how well the company is generating cash with the amount of 'shareholder's money' it has. There is one more thing which ROE tells you and which most financial websites don't mention. ROE also tells you how easy it is for the company to profitably expand its business. For example, let us take a situation where the company does not have any debt. Then an ROE of 25% means that the company is producing Rs. 25 for every Rs. 100 of assets it has. Thus if the company were to expand its business, then for every Rs. 100 spent on expansion, it would earn Rs. 25, which is greater than the usual interest rates. If ROE is roughly the same as the bank interest rates, then it means that even if the company expands, it will take a long time for it to make its investments in expansion profitable.

Variations: Return on Average Equity

The Book Value of a company can significantly change during a given year. In these circumstances, one can calculate the average book value (average of the book value in the beginning of the year and at the end of the year) and use it to calculate ROE.

What ROE does not tell you

ROE, like any other financial ratio is very far from being perfect. For example, ROE does not tell you anything about the debt of the company. As explained before it does say something about the potential of the company to expand its business, but does not actually tell you anything about the possible or expected growth of the company. Nevertheless, ROE is a very basic ratio, and used in addition with few other indicators like topline growth and financial ratios like P/E, Debt/Equity and profit margins can give a reasonable good and quick overview of the company.

ROE versus ROCE

A related ratio to Return on Equity is Return on Capital Employed (ROCE) or also called by the name of Return on Capital Invested (ROCI). ROCE is defined to be

ROCE = Operating Profit / Capital Employed.

Operating Profit means profit before tax, depreciation, interest and exceptional items. While Capital Employed is the cash (& assets) that was actually used to do the business in that year. The formula for calculating Capital Employed is

Capital Employed = Total Assets - Current Liabilities

Note that Current Liabilities are those liabilities which the company has to meet immediately (in the coming year). ROCE can sometimes give a slightly accurate picture than ROE, but I have found that overall if you look at the values of ROE for the past 5 years, you get roughly the same picture of the company as you would get by looking at values of ROCE. Moreover, ROE is easier to calculate.

Related Posts on Financial concepts and Investment Basics Understanding the P/E Ratio Return on Equity (ROE), ROCE and Shareholder's Equity Consolidated results vs. Standalone Results. Topline Growth vs Bottomline Growth

What makes 'bad' so hard?

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I enjoyed this quote from the movie 'As Good As It Gets':

Carol(Helen Hunt) - OK, we all have these terrible stories to get over, and you-...

Melvin(Jack Nicholson)- It's not true. Some have great stories, pretty stories that take place at lakes with boats and friends and noodle salad. Just no one in this car. But, a lot of people, that's their story. Good times, noodle salad. What makes it so hard is not that you had it bad, but that you're that pissed that so many others had it good.

Jack Nicholson was so damn funny in this :)


The take away from this (for me atleast) was that- what others get in life should not be a yardstick to measure what you get.. Lets appreciate that each of us is unique and lets bring out the best that we are capable of!

Indian barber in Singapore

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Not very sure whether it is ever felt to look for an Indian barber but today a friend of mine asked me for one. My friend is working for Shell and visiting from Nigeria. He really wanted to travel to Malaysia if he can't find one in Singapore.

So we started searching Internet but I kind of told him that the best place would be to just go to Serangoon Road / Little India to find out. We first did a google search to find but surprisingly we couldn't get with the search "Indian barbers" in Google Maps or Google search. It showed two places

• Corporation Road, Jurong
• Circuit Road, Macpherson

Another last minute search with " Barber in Serangoon Road"  in Google Maps showed couple. So we decided to go there. Weird enough, we couldn't find the saloon at the location. After a couple of queries around we found the location

• Campbell Lane ( 1.305393,103.852547). 

Don't expect a great saloon with all the nice things around. It does the job and the best part is the nice head massage we got. @ $10 this is great to have the experience and now I know why my friends always miss it in Singapore. I see the Malay barbers around in the corner but the Indian barbers are quite rare.
If you are going there worth a try ;)