To The Moon

Hey, tigers!

It's time for the "Learn US financial statements" column again. Today is the 5th day of our continuous learning...

In this article, I mainly introduce: how to judge the profitability of a company？

In today's article, we're going to learn another important skill:How to judge the profitability of a company.

To learn to judge the profitability of a company, we must know an important financial indicator: ROE（Return On Equity).

First, let's take a look at the concept of ''shareholders' equity''.

Looking at an example:

suppose you want to start a business. You have $1 million in your bank account, but you realize that won't be enough to grow your business in the future.

So, you decide to borrow some money from your buddy Jack.After some negotiation, you manage to persuade him. Jack invests $500 thousand in your company and becomes your partner.

Now you're the biggest shareholder, and he's now the second-biggest shareholder.

Following one year of operation, the company has $2 million left after deducting costs, expenses, and taxes. This $2 million is what is called shareholders’ equity, also known as the ''net asset value'' of the company.

Once we know what shareholders' equity is, return on equity is easy to understand.Return on equity, or ''ROE'', is simply the money that you and Jack will make back on your investment.ROE is an important indicator for all investors.

Understanding ROE will let you identify profitable companies.

ROE = net income ÷ shareholders' equity (net assets)

We can see from the formula that the amount of shareholders' equity directly impacts ROE.

A high ROE demonstrates strong earning power.

We should always look for strong companies with high ROE that will generate consistently healthy returns for us.

ROE is one of Buffet’s favorite indicators. He looks for companies with a ROE of at least 15%.

Did you know that Apple has maintained an average annual ROE of 45.5% over the past decade?

If you had bought 1,000 shares of Apple in November of 2011, it would have cost you $11,780.

The value of those same shares today would be $147,870.

That would mean a cumulative return of 1,250% over ten years!If you find and invest in a company with ROE consistently above 15% and hold onto it for the long term, you will have a good chance of seeing a healthy return in the future.

Now, you must have learned how to look at a company's profitability!

Now let's summarize:

Be sure to remember that when you want to invest in a company, check the ROE of the company. For companies whose ROE is above 15% all year round, you can include it in your own stock pool and continue to observe!

This is also the content of the 12th lesson of "US Stock Financial Statements for Beginners", click the blue direct link, Come and learn the full version together！

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