One of the ways to filter Good Stocks, Good Companies is to use a mixture of Financial Indices to get the Stocks/Companies that meet the individual requirements before conducting a detailed study of that Enterprise. . Prominent among them are the financial ratios ROE, ROA, ROS, EPS, P/E, … In this article, I would like to introduce one of the most important ones mentioned above is the ROE – Return on Capital. owner. This article is also part of the Basic Steps to Learn Stocks so you know how to Analyze Stocks. Key Issues include:
+ What is the ROE Financial Index? General formula.
Watching: What is Roe?
+ How is Net Profit in ROE Index understood?+ How is Equity in ROE Index understood?+ Disadvantages of ROE and its need , Fairness and How to Filter Stocks with ROE Index.
1. What is the ROE Financial Ratio? General formula
What is the concept of ROE: is the first 3 English acronyms of the word Return On Equity, which means Net Profit on Equity. This is why it is sometimes quickly referred to as the Return on Equity Index. This is one of the important Indicators, measuring the efficiency in using the Equity of the business. We have the General Formula of the ROE Financial Ratio:
In the figure: General Formula of ROE Financial Ratio and its components – Net Profit and Equity (Original image link)
It is easy to see in the General Formula above that ROE = Net Profit (Earnings) / Equity (Equity) * 100%. In which: Net profit and Equity will be explained in more detail below.
2. What is Net Profit in ROE and how is it understood?
What is net profit: understood as the final profit of the enterprise after deducting all Operating expenses, taxes, … and this is the Profit belonging to shareholders – Owner of the Company. Since the Company Model is divided into 2 types, the Net Profit will be understood according to each Model as follows:
+ Model without Subsidiaries: If the Enterprise has no Subsidiaries (holding >50% shares or more), Net profit will be the Company’s own profit after tax in the Financial Statements as shown in Figure 2. Image Profit after tax – PPC – 2018 Audit Report of PPC – Pha Lai Thermal Power Joint Stock Company (PPC has no subsidiaries). This is a simple case, quite a few companies on the floor apply this model.
+ Model with Subsidiaries: If the Enterprise has at least 1 Subsidiary (holding from 50% to
In the picture: Example of Net Revenue, Profit after tax and how it is accounted for in the Income Statement of the Financial Statements (Original link to the image)
In the above Example, Company A holds 70% shares in Company B so A is the Mother of B. On the Net Revenue side, it is easy to see that the Net Revenue on the Consolidated Financial Statements of Company A is equal to Total Sales. Net Revenue of Parent Company A and Subsidiary B (Consolidation 100% of Net Revenue of B). However, on the Profit side, Profit after tax on the Consolidated Statement of Parent Company A will be further broken down into 2 parts:
* Profit after tax Non-Controlling Shareholders: is the benefit of Small Shareholders in Subsidiary B – 30% of 10 billion Profit is 3 billion VND.* Profit after tax Parent company: is Profit on the Consolidated Financial Statements of the Parent Company’s Shareholders. Including: Profit after tax on the Financial Statement of Parent Company A – 100 billion and A’s percentage interest in Profit after tax Subsidiary B – 70% of 10 billion Profit is 7 billion. The real total here is 107 billion VND (Not 110 billion VND as many of you still think). And this is the Net Profit in the Subsidiary Model.
In the picture: types of profit after tax of MWG – Mobile World at Audited Consolidated Financial Statements 2018 (Original link photo)
3. What is Equity in the ROE Index and how is it understood?
– Equity in ROE: in a normal Financial Statement in the Equity section of the Balance Sheet, it is easy to see that there are always 2 Columns here, one for the Beginning Period (Usually Beginning of the Fiscal Year) and the other at the End of the Period (Usually the end of the period at the Time of Financial Statements). One of the very Basic mistakes that many people make is misapplying the Time of Equity to calculate the ROE.
In the picture: Financial Parameters Data and True / False Calculation of ROE Index due to True / False understanding of Equity (Original image link)
In the picture above is an example of a simple case where the Beginning’s equity is 1000 billion dong, because in the period Profit after tax is 200 billion dong, the ending equity is 1200 billion dong. One of the basic mistakes of many people is to just take Profit after tax for that Financial year and divide it directly by … Ending Equity. Here will be Profit 200 billion VND / Ending equity 1200 billion VND = 16.67%. It is surprising that in one view of the Stock Price List of a large Securities Company, I can see their ROE Calculation Results similar to that. That way, many people can only understand numbers without understanding the Financial Nature of ROE (Including Industry Insiders). The correct understanding should be: Profit 200 billion VND / Equity at the beginning of the period 1000 billion VND = 20%. You have Capital 1000, Profit 200 so that at the end of the year Capital becomes 1200, your Interest Rate for the year must be 20%.
4. What are the disadvantages of the ROE Index and the need for it?
– Disadvantages of ROE: Above, we also know that the ROE Index depends on 2 main variables, which are Net Profit and Beginning Equity of the Enterprise calculated for the full 12-month fiscal year. If Net profit is quite easy to determine as described above and there is not much influence from outside fluctuations (Because Profit is Profit and audited). However, when studying Equity, we find that Equity changes not only due to the Net Profit of the Enterprise, but also many other “non-pure” factors affecting: Cash Dividends , Capital surplus from Private placement, Stock swaps, mergers, …
If those factors have a small impact on Equity, then it doesn’t matter, ROE still reflects the nature of an important profitability measure of the Enterprise. However, in reality, when I go to analyze and evaluate enterprises, I have encountered many cases of “giant” mutations, which if applying the ROE Index, it does not reflect the nature of the Problem. Let’s see an example through the following image:
In the picture: Data on Financial Parameters when Raising Capital, Changing Equity and Calculating True / False ROE – ROAE Index to reflect Profitability Ratio (Original link of image)
In the above example, it is easy to see that the beginning of 2019 – Company A’s equity is only VND 200 billion, however, by the middle of the year, April 2019, the equity has changed drastically due to raising capital into another 800 billion VND (Temporarily calculated at that time is 1,000 billion VND). In the 2019 financial year, Company A’s profit is 100 billion dong, so its equity at the end of 2019 is 1,100 billion dong. Let’s analyze how to calculate this ROE as follows:
+ Option 1 – In the picture above: Profit 100 billion VND / Equity 200 billion VND = 50%. Obviously, this is not correct because the above 100 billion dong Profit is mainly due to 2/3 of the time of the year (From May to December 2019) after Company A increased capital, the effect from capital increase is the main, Moreover, the capital increase is too sudden from 200 to 1000 billion, so the application of the normal ROE calculation method will no longer be appropriate and does not reflect the true nature of the Enterprise.
+ Option 2 – In the picture above: Profit 100 billion VND / Equity 1100 billion VND = 9.09%. This is also not correct because the large Equity Level also starts from the middle of the year (From May 2019). Therefore, to calculate this case, we use another additional sub-Index for this case, the ROAE Financial Index.
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Pictured: General Formula of ROAE Financial Ratio and its components – Net Profit and Average Equity (Image link)
– What is ROAE: is a Financial Index that measures the profitability of a Company in a Financial year and stands for the first 4 English words – Return On Average Equity, which means Net Return on Equity average ownership. This is a supplementary indicator to the ROE Index when an Enterprise has too strong fluctuations in Equity during the period due to fluctuations. Capital does not come from Profit. In the image above, Part 3, it is easy to see that the ROAE Ratio will be Net Profit of VND 100 billion / Average Equity for the period = 15.38%.
It can be seen that this result is the most correct with Method 1 – 50% or Method 2 – 9.09% because it takes into account the influence of the Change in Equity during the period. Although it should be divided into the first 4 months 200 billion VND and 8 months later it is > 1000 billion VND (We don’t know Profit in 4 months, so I assume here is Profit, so I put it > 1000 billion VND), but However, because at the time of capital increase, the Enterprise usually does not have a Capital Audit, we do not know the exact Profit / Loss in the first 4 months of the year until preparing to increase capital, how much profit to calculate into Equity, so the average plan Divided by 2 is still considered the Best, Simplest and does not distort the Nature of the Profitability of the Enterprise.
5. What is the Meaning of ROE, ROAE, Reasonable Level and How to Filter Stocks with ROE Index
– Meaning and reasonableness of ROE ROAE: as analyzed above, ROE measures the efficiency of capital use of enterprises, or simply understood, with 1 dong of Equity, the return. How much profit? Therefore, the higher the ROE, the more effective the ability to use capital and this is the basis for assessing the profitability of the enterprise in the future. Many Securities Investment Analysts have used ROE ROAE as a Criterion to filter out Companies of interest before conducting a thorough research on those Enterprises (Which company has a lower ROE than the set criteria). out will be disqualified).
In terms of personal experience when using, there are a few notes to know how much ROE ROAE is reasonable:
+ ROE or ROAE > 15%: Companies with too low and lower ROE
+ Compare ROE or ROAE in the same industry: suppose I If you are interested in Banking Industry and want to choose 1 Banking Stock Code in your Portfolio, the Industry ROAE Index is one of the criteria for you to filter first. The selected stock code must have ROAE > Industry average, this is a pretty simple way if you don’t know much about that Industry.
In the above image, it is easy to see ROAE Profitability Index of 18 Banks listed on 3 Stock Exchanges in Vietnam, if according to General Criteria ROAE > 15% or Criteria for selecting only Stocks with ROAE higher than Average If the whole industry is 16.99%, we only get 8/18 of the following banks: ACB (25.9%), HDBank (18.36%), MBBank (21.25%), Techcombank (17.15%) , TPBank (22.05%), Vietcombank (27.14%), VIBank (27.76%) and VPBank (22.65%). For a more thorough selection, you can combine a number of other Financial Indices, before proceeding to research each of those Banks.
Also if ROE or ROAE
– How to Filter Stocks with ROE Index: The ROE Index has a fairly simple calculation, but for more convenience, in addition to calculating “just to be sure”, you can also use the data directly on Financial Websites or websites of securities companies. Through practical testing, in general, the ROE calculation results on many pages are not correct, simply they still take Profit after tax or Profit after tax of Shareholders of Parent Company in the last 4 quarters / Equity End of term. Even though it’s still not quite right, but if the same calculation gives a result that is much higher than other Companies, that Whole Market filter will also help me get a certain number of interesting Stocks according to the ROE Index. . Usually, I often filter the ROE Index through Cophieu68, you can refer to it as shown below.
In the picture: Filtering Stocks on Cophieu68 Page through 3 Basic Arrows as shown in Figure based on ROE > 15% (Original link in image)
You can also experiment with different ROE Requirements >20%, >25% or even >30% to experience the same Results. While no tool is perfect, this is still a must-try when you want to Filter Stocks before doing Detailed Research.
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Above are some of my analysis to explain what is the whole ROE Index, General Formula, Components of ROE Index, ROE Cons and the need for ROAE, ROE Meaning, ROE Level Include How much is reasonable and How to filter Stocks based on ROE. If you have any questions related to securities, you can contact me, I will support consulting.
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> Steps to Learn Securities> Guide to Opening a Securities Account / Securities Investment Trust Service – Invest “Household”> Basic Securities Course in Hanoi / Online Securities Course
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