It was interesting listening to “the Call” today when one of the viewers (Les, I think his name was) asked Mark Mooreland from Team Invest two questions about Return on Equity (ROE). The questions were saved up specifically for Mark
You would think that with the number of times Mark refers to ROE in justifying his calls that he would have been all over these questions. I’m sure Mark IS all over these and was just suffering a bad case of brain fog when put on the spot, as we all do from time to time.
I think Les would have come away completely confused after Marks response today. So if you’re here on Strawman Les, I hope this helps clarify your understanding:
Q1. What exactly is Return on Equity?
The formula for calculating ROE is simply NPAT/shareholder equity as a percentage.
You can’t use current ROE alone in evaluating the quality of a business. Other things to consider are:
Q2. How is high Return on Equity realised as the stock price is trending down?
The ROE of a business is not affected by the stock price. However, the stock price and PE ratio should follow the ROE over time. High PE is generally associated with businesses with consistently high ROE that can reinvest a significant portion of their earnings back into growth.
Ref: StockVal explanation