3. Return on Equity (ROE) - The Nasdaq Dozen
The next fundamental factor in the Nasdaq Dozen is return on equity (ROE). You will find the ROE information by first clicking on the Income Statement link under Fundamentals in the left menu (see Figure 6) and then clicking on the Financial Ratios link at the top of the Company Financials page (see Figure 7).
Why We Look at Return on Equity
ROE gives us a glimpse into how efficiently company management is producing a return for the owners of the company---based on the amount of equity in the company. To calculate ROE, divide the average shareholder’s equity during the past 12 months by the net profit the company has made during those same 12 months.
How to Score Return on Equity
- Pass: Give ROE a passing score if ROE has been increasing for two consecutive years.
- Fail: Give ROE a failing score if ROE is decreasing.
Looking at ROE for CMG in Figure 7, ROE should receive a failing score since it increased from 2011 to 2012 and decreased from 2012 to 2013.
Return on Equity: FAIL
All content in this article is supplied by Wade Hansen of Learning Markets. To learn more about their investor education offerings, please visit learningmarkets.com.
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