How to pick stock （part 9)

ROE in detail

Why i want to have a blog to concentrate on roe is because roe means how efficient on the management manage to earn more money with the capital given. It is a guideline for some investors including me to pick the stocks when I was start leaning.

Ok, now let me explain a little bit details on ROE. It is the combination of 3 elements

1. Net profit margin (net income / revenue)

It is a way to measure what is the bargain power or monopoly power for that company to sell a product in higher profit margin. In other word it could also due to the cost control by the company.

The trend on profit margin can tell us in which stage the products/services sold by the company. If the trend is going higher then we are to tell that the company is getting better in term of the business. Some reasons: economy of scales, cost control, bargain power.

So this is actually a very important factor for me when I choose a company. I would like to have a higher profit margin stock given the similar financial situation or same book size.

2. Asset turnover (revenue / asset )

Asset turnover is a tool to measure how efficient is the company to generate the revenue given the current asset. Normally this kind of company (higher asset turnover) would be a net cash flow company because they don't need a too big asset base to generate the business. This is second factor which I myself would like to focus on.

3. Equity multiplier( asset / equity)

This is leverage ratio, means how aggresive the company is to provide the asset for company to generate the revenue, and hence get get the profit from there.

I always think that this ratio should be between 0 to 0.50 in order to get a better credit rating as well as the business control, it doesn't mean that a bigger market cap company but how special is the company to aim a correct target and beat the rest competitors.

To be continued...