08 April 2013

ROE - How Fast The Company Can Grow

ROE in full name, Return On Equity, is one of the most financial indicators that I judge on how good the quality of the company management is.

If a company can maintain a very consistent pace of ROE, it means that the company can grow consistently. In CFA course, ROE can be measured in growth component by following formula:

g (sustainable growth rate) = ROE * (1 - Dividend Payout Ratio [DPR]), DPR = DPS / EPS

The higher g, the better growth prospect it is.

Nonetheless, this is the result that we can detect. We have to do more homework on ROE is generated, and what is the business model and tactical strategy applied by the management for sustainable growth. For example, Apple company has been transformed from computer maker to personal entertainment gadget maker such as iPod, iPhone, iPad, and coming i-Watch. Once it has expanded or venture into better growth prospect market, it may enjoy a better PE Ratio, however to success or not, it has to make sure it can become one of the market leaders so that it has a better bargaining power against suppliers and customers.

As far as I am concerned, the ROE can be maintained as consistent high range, this company does have some competitive edge against other company. I prefer to find a growing company in mature industry, it means that it does have something different from other players.

Let me know your questions here so that I could explain it in more detail to you.

4 comments:

  1. Can I have a real example with figure?

    ReplyDelete
  2. I have 1 example which I am going to write it in this website later. Thanks.

    ReplyDelete
    Replies
    1. I see, thank you for reply.

      Delete
  3. Hey Jack what about counters that pay zero dividend but actively repurchase its own shares?

    ReplyDelete

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