What is the standard for a good company?What is the "capital adequacy ratio" that management should know?
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ROE (Return on Equity) is an index used when analyzing the efficiency of a business.
"Capital adequacy ratio" is a management index to see if the financial base of a company is stable.Equity needs repayment ... → Continue reading
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Return on equity
Acronym OfROEIt is,JapanIt is also used in Japan.Long time ago
Return on equity is used to determine "how efficiently profits were earned relative to the amount invested by shareholders" through one year of corporate activities. It is judged that the higher the ROE value, the more efficiently the capital is used to make a profit.
Derivative terms of return on equity include return on equity and return on equity.percentageThe former is calculated by operating profit ÷ equity capital × 100 [%], and the latter is calculated by ordinary income ÷ equity capital × 100 [%].
あるCompanyHowever, through one year of corporate activities, "ShareholderIt is an index used to judge "how efficiently the profit was obtained compared to the investment amount of", and it is the net income divided by the average value of the equity capital of the previous term and the current term.Ordinary profit may be used as the numerator.
- Return on Equity (ROE) = Net Income ÷ Equity x 100 [%]
Earnings per share It can also be expressed using (EPS) and (BPS), in which case the formula is as follows.
- Return on equity (ROE) = Earnings per share (EPS) ÷ Net assets per share (BPS)
* Please note that equity capital is described as "shareholders' equity" in the company's quarterly report.
Return on equity analysis method
|=Net income||×||amount of sales||×||Total assets|
|=Profit margin on sales||×||Total asset turnover||×||Financial leverage|
Profit margin on sales is for companiesProfitabilityThe total asset turnover represents efficiency, and the financial leverage represents financial stability.As you can see from the formula, the financial leverage isCapital adequacy ratio OfReciprocal.
Means to improve return on equity
As mentioned above, return on equity is expressed as the product of net income on sales, total asset turnover and financial leverage.Therefore, by improving these figures, it is possible to improve the return on equity.The specific method is as follows.
- Improve profit margin on sales ... Develop products with high profit margin
- Improve total asset turnover ... Increase sales or sell idle assets
- Improve financial leverage ... liabilitiesIncrease the rate of use of
- Return on total assets (ROA)
- Profitability analysis
- Earnings per share (EPS)
- Debt ratio
- JPX Nikkei Index 400 ――When selecting constituent stocks, we emphasize ROE and operating income for the last three years.