What is Return on Equity (ROE)?

Learn With Stanley
24 May 202005:47
EducationalLearning
32 Likes 10 Comments

TLDRIn this video, Stanley emphasizes the importance of the Return on Equity (ROE) ratio for investors, highlighting it as Warren Buffett's favorite metric. ROE measures a company's efficiency in generating profit from shareholder investments. By comparing assets, liabilities, and equity, investors can assess a company's profitability and efficiency across different industries. Stanley illustrates this with examples and encourages the use of ROE alongside other financial ratios for a comprehensive stock analysis. The video also introduces FSM One, a cost-effective brokerage platform for Singaporean investors, offering a promo code for a rewards point bonus.

Takeaways
  • 😀 Investing should be viewed as a business decision, not just numbers on a stock exchange.
  • 📈 Return on Equity (ROE) is a key ratio for investors, favored by Warren Buffett.
  • 🏢 ROE measures a company's efficiency in generating profit for its shareholders from its equity.
  • 💡 Assets, liabilities, and equity are the three components that make up a company's balance sheet.
  • 🏠 An example of calculating ROE is given using a property with assets, liabilities, and equity.
  • 💰 ROE is calculated as net profit divided by shareholders' equity, showing the profit generated from invested money.
  • 🔎 ROE can vary greatly across industries, with different benchmarks for different sectors.
  • 📊 A comparison is made between a utility company and Facebook to illustrate the difference in ROE due to business models.
  • 🚀 Investors should look for companies with high ROE as it indicates a company's ability to generate more profit for shareholders.
  • 🧐 ROE is one of many financial ratios that should be used in combination for a comprehensive stock analysis.
  • 📈 FSM One is a low-cost brokerage platform mentioned for those ready to invest, with a promo code offer for new users.
Q & A

  • What is the main message of the video script?

    -The main message of the video script is to emphasize the importance of the return on equity (ROE) ratio for investors and to explain why it is Warren Buffett's favorite ratio for evaluating a company's efficiency in generating profit for its shareholders.

  • Who is the mentor of Warren Buffett and what is his famous quote mentioned in the script?

    -Warren Buffett's mentor is Benjamin Graham, and the famous quote mentioned in the script is 'Investing is most intelligent when it's most businesslike.'

  • What does the return on equity (ROE) ratio measure?

    -The return on equity (ROE) ratio measures how efficiently a company is in producing a profit for its shareholders.

  • What are the three components that make up a company's balance sheet?

    -The three components that make up a company's balance sheet are assets, liabilities, and equity.

  • How is the return on equity (ROE) calculated?

    -The return on equity (ROE) is calculated by dividing the net profit by the shareholders' equity.

  • Why is it important to consider a company's ROE when investing?

    -It is important to consider a company's ROE when investing because it shows the company's efficiency in generating profit from the money that it has invested, indicating how well the company is utilizing its resources.

  • What is an example of a company with a high ROE mentioned in the script?

    -An example of a company with a high ROE mentioned in the script is Facebook, which has a ROE of 22%.

  • What is the difference between the ROE of a utility company and a technology company like Facebook?

    -The difference is that utility companies like Sembcorp Industries have a lower ROE (3.6%) compared to technology companies like Facebook, which has a much higher ROE (22%). This is because technology companies generate profit from their talent and intellectual property, which are not reflected in the balance sheet.

  • How does the script suggest using the ROE ratio in conjunction with other financial ratios?

    -The script suggests using the ROE ratio in conjunction with other financial ratios to gain a clearer picture of the company and make better investment decisions.

  • What is the promotional offer mentioned in the script for FSM one brokerage?

    -The promotional offer mentioned in the script for FSM one brokerage is 1,000 reward points when a new account is started using the provided promo code.

  • How can viewers learn more about investing according to the script?

    -Viewers can learn more about investing by clicking on the link in the show notes provided in the script, which offers a free online course.

Outlines
00:00
📈 Understanding Return on Equity (ROE)

This paragraph introduces the concept of Return on Equity (ROE) as a crucial metric for investors, highlighting its significance as Warren Buffett's favorite ratio. It explains ROE as a measure of a company's efficiency in generating profits for its shareholders, using the balance sheet components: assets, liabilities, and equity. The script provides an example to illustrate how ROE is calculated and emphasizes its importance in evaluating a company's performance. It contrasts two companies with different equity sizes but the same profit, showing that a higher ROE indicates greater efficiency. The paragraph concludes by noting that while ROE is valuable, it should be considered alongside other financial ratios for a comprehensive analysis.

05:01
🌐 Investing and Trading with FSMOne

The second paragraph shifts focus to practical investment advice, promoting FSMOne as a cost-effective brokerage platform with transparent pricing and access to Singapore, Hong Kong, and US markets. It invites viewers to open an account using a promo code for a reward and encourages further investment education through a free online course. The script ends with a call to action for viewers to like, share, subscribe, and turn on notifications for future videos, ensuring they stay updated with the channel's content.

Mindmap
Keywords
💡Return on Equity (ROE)
Return on Equity (ROE) is a financial metric that measures the efficiency of a company in generating profit from its shareholders' equity. It is calculated by dividing net profit by shareholders' equity. In the video, ROE is highlighted as Warren Buffett's favorite ratio, indicating its importance in evaluating a company's profitability and efficiency. The script uses an example of a property generating rental profit to illustrate how ROE is calculated and its significance in comparing companies' performance.
💡Investing
Investing, in the context of the video, refers to the act of allocating resources, typically money, with the expectation of generating income or profit. The video emphasizes the intelligent and businesslike approach to investing, as taught by Warren Buffett's mentor, Benjamin Graham. It suggests that investors should view stocks as representations of real businesses and understand them through financial ratios like ROE.
💡Asset
An asset in the video represents the value of all the things a company possesses, such as property, cash, or inventory. It is a component of the balance sheet, which is crucial for understanding a company's financial health. The script uses the example of a company with a property worth $1,000,000 to explain how assets contribute to the calculation of shareholders' equity and ROE.
💡Liability
Liability refers to the value of what a company owes to others, such as loans or debts. In the video, it is used to illustrate how a company's liabilities reduce the net value of its assets, affecting shareholders' equity. The script mentions a company financing its property with a bank loan, which is a liability, to explain the concept.
💡Equity
Equity in the video is the remaining value of a company after subtracting liabilities from assets. It represents the net worth attributable to shareholders. The script explains that equity is a key component in calculating ROE, as it shows how much of the company's value is owned by its shareholders.
💡Net Profit
Net profit is the profit a company makes after deducting all its expenses from its total revenue. It is an essential figure in the calculation of ROE, as shown in the script's example where a property generates a rental profit of $20,000, which is considered the net profit for the purpose of calculating ROE.
💡Efficiency
Efficiency, in the context of the video, relates to how well a company can generate profit from its resources. The higher the ROE, the more efficient the company is considered to be at producing profit for its shareholders. The script uses the comparison between Company A and Company B to demonstrate the efficiency of a company in generating profits with different levels of equity.
💡Industry Comparison
Industry comparison is the process of evaluating a company's performance against others in the same industry. The video uses the example of comparing a utility company with Facebook to illustrate how different industries can have vastly different ROEs due to the nature of their business models and how they generate profits.
💡Financial Ratios
Financial ratios are quantitative measurements used to evaluate a company's financial performance and position. The video emphasizes the importance of using multiple financial ratios, including ROE, to gain a comprehensive understanding of a company's financial health and make informed investment decisions.
💡Investment Decision
An investment decision in the video refers to the choice made by an investor to allocate resources into a particular investment opportunity. The script suggests that understanding and analyzing financial ratios like ROE can help investors make better investment decisions by providing a clearer picture of a company's profitability and efficiency.
💡Promo Code
A promo code, as mentioned in the video, is a code provided by companies to offer discounts or rewards to customers. In the context of the video, the promo code is used as an incentive for viewers to start an account with FSM One, a brokerage platform, and receive 1,000 reward points.
Highlights

Return on Equity (ROE) is Warren Buffett's favorite ratio for investors to understand a company's efficiency in profit generation for shareholders.

Investing should be approached as understanding real businesses, not just numbers on a stock exchange, according to Benjamin Graham.

ROE is calculated by dividing net profit by shareholders' equity, reflecting the company's ability to generate profit from invested capital.

A company's balance sheet consists of assets, liabilities, and equity, which are key to understanding financial health.

An example illustrates how a company with $1,000,000 in assets and $900,000 in liabilities has an equity of $100,000 and a 20% ROE from rental profits.

A higher ROE indicates a company's efficiency in using resources to generate profit for shareholders.

Comparing two companies with the same net profit but different equity sizes shows the importance of ROE in evaluating business efficiency.

Industry differences can lead to varying ROEs, such as the lower ROE of a utility company compared to a technology company like Facebook.

Facebook's higher ROE is attributed to profit generation from talent, which isn't reflected on the balance sheet.

Investors should seek companies with high ROE as an indicator of their ability to generate more profit for shareholders.

ROE should be considered alongside other financial ratios for a comprehensive analysis of a company's performance.

FSM One is introduced as a low-cost brokerage with transparent pricing and access to multiple markets, recommended for investment.

A promo code is offered for 1,000 reward points when starting an account with FSM One.

The presenter, Stanley, invites viewers to learn more about investing through a free online course provided in the show notes.

The video concludes with an invitation to like, share, subscribe, and turn on notifications for the channel's next video.

The importance of subscribing to the channel and engaging with its content is emphasized for continued investment education.

Transcripts

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Investing BasicsReturn on EquityBusiness EfficiencyWarren BuffettFinancial RatiosAsset ManagementProfit GenerationStock AnalysisInvestment StrategyROE Calculation