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Return on Net worth

The return on net worth refers, how much percentage of the money earned by equity investment. Generally, the company’s balance sheet divided as three parts such as, Assets, liabilities, and Equity. The share-holders equity column shows equity investment and retain earnings of the company.

 Simply put, Total assets will be subtracted from liability the remaining amount is equity or net worth. A company’s net profit after paid off dividend its remaining amount will be added into share-holders equity. If increase the company’s net profit which will come back to share-holders equity. So, Return on Net worth or Return on Equity are more benefit form equity holder perspective mot an investor.

      Return on Equity  = share holders Equity   

                                                Net profit                                                                                                                                                                                                                                 

How much profit generate through share-holders financing then how much profit get through it. Here, assets and borrowed money are not consider in ROE.  In other words,

By measuring the ROE, the stock market can find out whether this investment is lucrative or expensive. Increasing ROE that shows, company efficiently control operating cost without additional finance. Surging of the ROE and EBITDA margin are a good sign to investors sooner market will respond to that Good numbers as a result stock price will soar. Spiral down of ROE would signify inefficiency of management as a result stock price will decline.

The ROE above 15% which stock will be considered as growth at the same time below 10% the stock market will punish that stock for low return. probably, technology stock and service sector industries would show higher ROE. Capital intensive sector industries would show moderate profits. 

  Return on Equity is key indicator when taking the stock investment decision. The investors can figure out a company’s valuation further, investor should evaluate some other important ratios with ROE.

The price Book ratio is slight differ from ROE. The price book ratio which calculated total assets and also count Debt amount. But ROE would take only net share-holders value. When Surging ROE while declining P/B ratio, company’s liability is increasing dramatically. Likewise, increasing of ROE along with increasing of P/B ratio which means the company is growing rapidly and manage their share-holders fund efficiently.