'Return On Equity - ROE'

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. There are several variations on the formula that investors may use: 1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: return on common equity (ROCE) = net income preferred dividends / common equity. 2. Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two. 3. Investors may also calculate the change in ROE for a period by first using the shareholders' equity figure from the beginning of a period as a denominator to determine the beginning ROE. Then, the end-of-period shareholders' equity can be used as the denominator to determine the ending ROE. Calculating both beginning and ending ROEs allows an investor to determine the change in profitability over the period. Things to Remember

If new shares are issued then use the weighted average of the number of shares throughout the year. For high growth companies you should expect a higher ROE.

Averaging ROE over the past 5 to 10 years can give you a better idea of the historical growth. How Return On Equity Can Help You Find Profitable Stocks It pays to invest in companies that generate profits more efficiently than their rivals. Return on equity (ROE) can help investors distinguish between companies that are profit creators and those that are profit burners. On the other hand, ROE might not necessarily tell the whole story about a company, and therefore must be used carefully.

What Is ROE?
By measuring how much earnings a company can generate from assets, ROE offers a gauge of profit-generating efficiency. ROE helps investors determine whether a company is a lean, mean profit machine or an inefficient clunker. Firms that do a good job of milking profit from their operations typically have a competitive advantage - a feature that normally translates into superior returns for investors. The relationship between the company's profit and the investor's return makes ROE a particularly valuable metric to examine. To find companies with a competitive advantage, investors can use five-year averages of the ROEs of companies within the same industry.

ROE Calculation
A company's ROE ratio is calculated by dividing the company's net income by its shareholder equity, or book value. The formula is simple: Net Income Shareholders\' Equity

You can find net income on the income statement, but you can also take the sum of the last four quarters worth of earnings. Shareholders equity, meanwhile, is located on the balance sheet and is simply the difference between total assets and total liabilities. Shareholder equity represents the tangible assets that have been produced by the business. Both net income and shareholder equity should cover the same period of time. (To learn more, read Breaking Down The Balance Sheet.)

How Should ROE Be Interpreted?

ROE offers a useful signal of financial success since it might indicate whether the company is growing profits without pouring new equity capital into the business. A steadily increasing ROE is a hint that management is giving shareholders more for their money, which is represented by shareholders' equity. Simply put, ROE indicates know how well management is employing the investors' capital invested in the company. It turns out, however, that a company cannot grow earnings faster than its current ROE without raising additional cash. That is, a firm that now has a 15% ROE cannot increase its earnings faster than 15% annually without borrowing funds or selling more shares. But raising funds comes at a cost: servicing additional debt cuts into net income and selling more shares shrinks earnings per share by increasing the total number of shares outstanding. So ROE is, in effect, a speed limit on a firm's growth rate, which is why money managers rely on it to gauge growth potential. In fact, many specify 15% as their minimum acceptable ROE when evaluating investment candidates. ROE Isn't Perfect ROE is not an absolute indicator of investment value. After all, the ratio gets a big boost whenever the value of the shareholder equity, the denominator, goes down. FXCM -Online Currency Trading Free $50,000 Practice Account

If, for instance, a company takes a large write-down, the reduction in income (ROE's numerator) occurs only in the year that the expense is charged; the write-down therefore makes a more significant dent in shareholder equity (the denominator) in the following years, causing an overall rise in the ROE without any improvement in the company's operations. Having a similar effect as write-downs, share buy-backs also normally depress shareholders' equity proportionately far more than they depress earnings. As a result, buy-backs also give

an artificial boost to ROE. (For related reading, see How Buybacks Warp The Price-To-Book Ratio.) Moreover, a high ROE doesn't tell you if a company has excessive debt and is raising more of its funds through borrowing rather than issuing shares. Remember, shareholder's equity is assets less liabilities, which represent what the firm owes, including its long- and short-term debt. So, the more debt a company has, the less equity it has; and the less equity a company has, the higher its ROE ratio will be. Suppose that two firms have the same amount of assets ($1,000) and the same net income ($120) but different levels of debt: Firm A has $500 in debt and therefore $500 in shareholder's equity ($1,000 - $500), and Firm B has $200 in debt and $800 in shareholder's equity ($1,000 - $200). Firm A shows an ROE of 24% ($120/$500) while Firm B, with less debt, shows an ROE of 15% ($120/$800). As ROE equals net income divided by the equity figure, Firm A, the higher-debt firm, shows the highest return on equity. This company looks as though it has higher profitability when really it just has more demanding obligations to its creditors. Its higher ROE may therefore be simply a mask of future problems. For a more transparent view that helps you see through this mask, make sure you also examine the company's return on invested capital (ROIC), which reveals the extent to which debt drives returns. Another pitfall of ROE concerns the way in which intangible assets are excluded from shareholder's equity. Generally conservative, the accounting profession normally omits a company's possession of things like trademarks, brand names, and patents from asset and equity-based calculations. As a result, shareholder equity often gets understated in relation to its value, and, in turn, ROE calculations can be misleading. A company with no assets other than a trademark is an extreme example of a situation in which accounting's exclusion of intangibles would distort ROE. After adjusting for intangibles, the company would be left with no assets and probably no shareholder equity base. ROE measured this way would be astronomical but would offer little guidance for investors looking to gauge earnings efficiency. Conclusion Let's face it, no single metric can provide a perfect tool for examining fundamentals. But contrasting the five-year average ROEs within a specific industrial sector does highlight companies with competitive advantage and with a knack for delivering shareholder value. Think of ROE as a handy tool for identifying industry leaders. A high ROE can signal unrecognized value potential, so long as you know where the ratio's numbers are coming from.

Feasibility study
The feasibility study is an evaluation and analysis of the potential of the proposed project which is based on extensive investigation and research to support the process of decision making. Overview Feasibility studies aim to objectively and rationally uncover the strengths and weaknesses of an existing business or proposed venture, opportunities and threats present in the environment, the resources required to carry through, and ultimately the prospects for success In its simplest terms, the two criteria to judge feasibility are cost required and value to be attained. As such, a well-designed feasibility study should provide a historical background of the business or project, description of the product or service, accounting statements, details of the operations and management, marketing research and policies, financial data, legal requirements and tax obligations. Generally, feasibility studies precede technical development and project implementation. A feasibility study evaluates the project's potential for success; therefore, the perceived objectivity is an important factor in the credibility to be placed on the study by potential investors and lending institutions It must therefore be conducted with an objective, unbiased approach to provide information upon which decisions can be based

Feasibility study topics

Common factors The acronym TELOS refers to the five areas of feasibility - Technical, Economic, Legal, Operational, and Scheduling. Technology and system feasibility The assessment is based on an outline design of system requirements, to determine whether the company has the technical expertise to handle completion of the project. When writing a feasibility report, the following should be taken to consideration:

A brief description of the business to assess more possible factor/s which could affect the study The part of the business being examined The human and economic factor The possible solutions to the problems

At this level, the concern is whether the proposal is both technically and legally feasible (assuming moderate cost).

Legal Feasibility Determines whether the proposed system conflicts with legal requirements, e.g. a data processing system must comply with the local Data Protection Acts. Operational Feasibility Operational feasibility is a measure of how well a proposed system solves the problems, and takes advantage of the opportunities identified during scope definition and how it satisfies the requirements identified in the requirements analysis phase of system development. The operational feasibility assessment focuses on the degree to which the proposed development projects fits in with the existing business environment and objectives with regard to development schedule, delivery date, corporate culture, and existing business processes. To ensure success, desired operational outcomes must be imparted during design and development. These include such design-dependent parameters such as reliability, maintainability, supportability, usability, producibility, disposability, sustainability, affordability and others. These parameters are required to be considered at the early stages of design if desired operational behaviors are to be realized. A system design and development requires appropriate and timely application of engineering and management efforts to meet the previously mentioned parameters. A system may serve its intended purpose most effectively when its technical and operating characteristics are engineered into the design. Therefore operational feasibility is a critical aspect of systems engineering that needs to be an integral part of the early design phases. Economic Feasibility The purpose of the economic feasibility assessment is to determine the positive economic benefits to the organization that the proposed system will provide. It includes quantification and identification of all the benefits expected. This assessment typically involves a cost/ benefits analysis. Technical Feasibility The technical feasibility assessment is focused on gaining an understanding of the present technical resources of the organization and their applicability to the expected needs of the proposed system. It is an evaluation of the hardware and software and how it meets the need of the proposed system Schedule Feasibility A project will fail if it takes too long to be completed before it is useful. Typically this means estimating how long the system will take to develop, and if it can be completed in a given time period using some methods like payback period. Schedule feasibility is a measure of how reasonable the project timetable is. Given our technical expertise, are the project deadlines reasonable? Some projects are initiated with specific deadlines. You need to determine whether the deadlines are mandatory or desirable.

Other feasibility factors Market and real estate feasibility Market feasibility studies typically involve testing geographic locations for a real estate development project, and usually involve parcels of real estate land. Developers often conduct market studies to determine the best location within a jurisdiction, and to test alternative land uses for given parcels. Jurisdictions often require developers to complete feasibility studies before they will approve a permit application for retail, commercial, industrial, manufacturing, housing, office or mixed-use project. Market Feasibility takes into account the importance of the business in the selected area. Resource feasibility This involves questions such as how much time is available to build the new system, when it can be built, whether it interferes with normal business operations, type and amount of resources required, dependencies, Cultural feasibility In this stage, the project's alternatives are evaluated for their impact on the local and general culture. For example, environmental factors need to be considered and these factors are to be well known. Further an enterprise's own culture can clash with the results of the project. Financial feasibility In case of a new project, financial viability can be judged on the following parameters:

Total estimated cost of the project Financing of the project in terms of its capital structure, debt equity ratio and promoter's share of total cost Existing investment by the promoter in any other business Projected cash flow and profitability

The financial viability of a project should provide the following information.Full details of the assets to be financed and how liquid those assets are.

Rate of conversion to cash-liquidity (i.e. how easily can the various assets be converted to cash?). Project's funding potential and repayment terms. Sensitivity in the repayments capability to the following factors: o Time delays. o Mild slowing of sales. o Acute reduction/slowing of sales. o Small increase in cost. o Large increase in cost. o Adverse economic conditions.

Market research study and analysis This is one of the most important sections of the feasibility study as it examines the marketability of the product or services and convinces readers that there is a potential market for the product or services. If a significant market for the product or services cannot be established, then there is no project. Typically, market studies will assess the potential sales of the product, absorption and market capture rates and the project's timing. The feasibility study outputs the feasibility study report, a report detailing the evaluation criteria, the study findings, and the recommendations.