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Equity Insights Elite @EquityInsightss on x 47K followers
Created: 2025-07-13 06:50:16 UTC
📌Return On Equity (RoE) ~ Key metric for Equity Investors
Everything you need to know⏬
✅ROE = Net Profit ÷ Shareholder's Equity
Shareholders’ Equity = Total Assets – Total Liabilities (a.k.a. Net Worth / Book Value)
– Shows profit generated per rupee of equity – Higher ROE ⇒ more efficient at creating shareholder returns – Varies by sector, so best compared among peers in the same industry
Factors that can distort ROE – One‑off gains (asset revaluations, extraordinary income) can temporarily inflate ROE – Equity issuance like QIP dilutes ROE – RoE be boosted by higher financial leverage or share buybacks – Intangible write‑offs reduce equity base and lift ROE
Use 3/5 yr average ROE to iron out cyclicality Compare ROE to cost of equity: Persistently above cost of equity indicates value creation
DuPont Analysis helps break down Return on Equity (ROE) into key components
X. Net Profit Margin = Net Profit / REV X. Asset Turnover = REV / Total Assets X. Financial Leverage = Total Assets / Equity
ROE = Net Profit Margin × Asset Turnover × Financial Leverage = (Net Profit / REV) × (REV / Assets) × (Assets / Equity)
Sustainable Growth Rate (SGR) – Shows Max growth a firm can self-fund from retained earnings
Formula: SGR = ROE × (1 – Dividend Payout Ratio) – Eg: ROE : XX %, Payout : XX % ⇒ SGR ≈ XXXX %
Growing above SGR → needs extra debt/equity Growing below SGR → surplus cash, room for higher payouts
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