# What are ROE ROA on the stock exchange

### Important metrics for stocks - Part 1

Before buying shares, you should take a closer look at the company in question. However, you can of course spend a lot of time doing it if you analyze the balance sheets of large corporations intensively and compare them with other companies.

However, there are some key figures for stocks that are relatively easily accessible (for example: finance.yahoo.com or onvista.de) and with the help of which an investor can already get a good overview of the desired company. The most important of these parameters are briefly presented here and shown how they can best be used in practice.

For the depository of the dividend aristocrats, we have already used some parameters intuitively for the selection of the titles.

Price-earnings ratio (P / E)

The P / E ratio is one of the most prominent key figures and is determined by dividing the price of the share by the earnings per share. This figure indicates how many times the annual profit a company has to pay on the stock exchange. The earnings per share can be seen free of charge for numerous individual titles, e.g. on the websites of comdirect or Cortal Consors. In English-speaking countries, earnings per share are called the "price / earnings ratio".

Unfortunately, reliable figures can only be determined on the basis of past values, because earnings per share are not known in advance.

On average in a broad stock market, P / E ratios around 15 are the limit between inexpensive (<15) or expensive (> 15). Of course, this is only a rough guide.

However, especially in corporations with a fairly stable business model, general corrections or even bear markets can turn the associated share into a bargain.

Some market participants instead calculate the so-called profit yield, i.e. how much profit the investor receives per year for the respective purchase price. With a P / E ratio of 20, the profit yield is 1/20 ==> 5%, a P / E ratio of 10 means a profit yield of 1/10 ==> 10%

Cash flow per share and price-cash flow ratio (KCV)

The cash flow is an indicator of the financial strength of a company and should of course be positive. A negative cash flow over a longer period of time carries the risk that the company will eventually run out of money and invoices can no longer be paid. In the standard case, the cash flow per share is calculated from the cash flow from operating activities divided by the number of shares.

In contrast to profit, the cash flow is a more meaningful parameter. In the cash flow calculation, some parameters (such as depreciation or provisions) that influence profit are taken into account and are more difficult to manipulate by management.

The market value of the share divided by the cash flow per share results in the parameter KCV. Similar to the P / E ratio, the lower the value, the cheaper the share is in terms of price. At Cortal Consors under "financial figures" these values ​​are listed for numerous stocks for the past three years.

Dividend yield

The dividend yield is calculated by dividing the dividend yield by the current share price. For investors who want to earn a regular passive income, this size is quite relevant when purchasing shares in a company. Stocks with a high dividend yield provide investors with decent cash flow.

However, there is only a high dividend yield with a higher risk. Values ​​of 10% and more are of a temporary nature in the standard case. It usually doesn't take long for the stock to lose value very significantly and dividend cuts are often not long in coming. A rather dramatic example was Armor Residential REIT (ISIN: US0423151010) in 2012 and 2013.

Equity ratio

The ratio of equity to total available capital is called the equity ratio. Companies should not fall below an equity ratio of 30% so that there is still a "financial cushion" for economically weaker times. Microsoft and Apple, for example, had equity ratios of 50 to 60% in 2014.

Only banks, insurers and other financial service providers usually have significantly lower equity ratios around 10%, since their business model is to lend money.

Return on Equity (RoE)

The return on equity is synonymous with the return on the invested equity. Mostly the English term Return on Equity (RoE) is used.
In the standard case, the profit for the year (after taxes) is used and divided by the average equity.

A low return on equity (in the single-digit percentage range) indicates an inefficient use of capital. A high return on equity is an indication of a high level of outside capital (credit) with a correspondingly higher risk due to the dependency on creditors. Or the company has a competitive advantage. As a result, companies with low debt and high return on equity are pretty sought after by investors.

Return on investment (ROI)

Return on Assets (also: Return on Investment RoI)

The RoI is made up of the ratio of annual surplus to total capital. The return on investment is synonymous with the return on the entire capital that a company has. Ultimately, it is based on the fact that the highest added value of a company occurs when it can be sold as quickly as possible, as much as possible, at a high price and at the lowest possible cost.

Return on investment (RoA)

Return on Assets (also: Return on Invested Capital RoIC)

In the annual surplus, which was used to calculate the RoI, the interest for the lenders is already deducted and no longer included. Especially in the case of companies with a high proportion of debt capital, the RoI can lead to an incorrect picture of the total return on capital. If, on the other hand, the interest expense is added back to the annual net income, one obtains the company's income, which is available to both equity and debt capital providers.

The higher this value, the greater the financial "cushion" in economically difficult times - a quality feature for investors.

The return on investment can also be used to estimate the growth potential of the respective business model. Because this key figure indicates how much return can be expected if, for example, a new branch is opened.

Return on investment values ​​below 5% indicate either a bad business model or a highly competitive industry. With values ​​above 20% - which is very rare - the company can benefit from a very good business model. Examples of companies with a relatively high ROI on the "Money Machines of the World" page.

You have to consider the low return on investment, usually between 1 and 3%, which is usual for banks, financial service providers and insurance companies. As mentioned above, only a low equity ratio is common in this industry.

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