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ROE / ROIC

ROE / ROIC. By Brendan Mathews. Return on Equity. Definition: ROE = One year’s earnings / Shareholder’s equity. Driven by three things: Profit margins Asset Management Leverage. Return on Equity. ROE = [earnings / sales] * [sales / assets] * [assets / equity].

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ROE / ROIC

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  1. ROE / ROIC By Brendan Mathews

  2. Return on Equity Definition: ROE = One year’s earnings / Shareholder’s equity Driven by three things: Profit margins Asset Management Leverage

  3. Return on Equity ROE = [earnings / sales] * [sales / assets] * [assets / equity]

  4. Return on Invested Capital • ROIC = Earnings / (Equity + Debt)

  5. Business A Started with $10,000 Earned $1,500 in 1st year ROE = %15 Business B Started with $10,000 Earned $1,200 in 1st year ROE = %12 ROE vs ROIC

  6. Business A Started with $10,000 Earned $1,500 in 1st year ROE = %15 Borrowed $5,000. ROIC = %10 Business B Started with $10,000 Earned $1,200 in 1st year ROE = %12 Zero Debt ROIC = %12 ROIC vs ROE

  7. Conclusion The best businesses have a high ROIC / ROE and little debt. QUESTIONS?

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