Thank you for watching the video very carefully, and highlighting the typo. I should have typed (in the PowerPoint presentation that is the basis for the video): ROE (Return On Equity) = ROA (Return On Assets) * leverage.
You're welcome! Happy to hear that. The video you watched compares the various RO* calculations, I also have one specifically on ROIC with more examples and comparisons between companies that I think you'll enjoy: th-cam.com/video/wLvCmFDEBXc/w-d-xo.html
@@TheFinanceStoryteller watched it already hehe thanks for the recommendation,btw are you a teacher? What are you doing exactly how can u explain this so well done
I deliver finance and business training at large corporations. Working with employees from entry level to director level to understand the finance vocabulary, and make better decisions that align with the corporate goals. Great fun. Had lots of questions from audiences over the years on various topics, those became the basis for a lot of the videos on the channel. Classroom training is obviously not happening right now, so delivering webinars instead. Planning my first TH-cam-based webinar for next week! th-cam.com/video/LXjrP48Q8Y0/w-d-xo.html
@@TheFinanceStoryteller Wow thats interesting,im really into this stuff and i only learn from youtube/books since im just 18 and waiting on my university experience which is delayed by the corona virus😞.At what chance that webinar is free? Im sorry but i dont quite have the money to pay from my own money.
Webinar will be (paid) members-only, but you can get the idea of the structure of how to approach an analysis of a company by watching some of my other finance case studies: th-cam.com/video/PI9X5Ybek_E/w-d-xo.html
Some people would take ROIC for that, in particular in relation to EVA (Economic Value Added): th-cam.com/video/LHXOIHQcyOw/w-d-xo.html Historical results for ROIC, ROE, ROA, ROI don't necessarily reflect the potential for future value creation. Personally, I mostly focus on the potential for a company to generate revenue growth, margin improvement, and free cash flow in the coming years: th-cam.com/video/jG-oXx54qxE/w-d-xo.html
Almost. Assets = liabilities + equity. Liabilities is a broader term than just interest-bearing debt, it also includes accounts payable, taxes payable, deferred revenue, deferred tax liabilities, etc. In ROIC, companies tend to take only the interest bearing debt rather than the full section of liabilities from the balance sheet. See also my ROIC video: th-cam.com/video/wLvCmFDEBXc/w-d-xo.html
excellent video! Do you think it is important to see these ratios based on the price / book value? If I understand correctly, they are metrics that measure the profitability of the book value (at least the ROE) So for example, if a company has an ROE of 20% but trades at a price / book value of 10 times, I am having a return on my investment of only 2%, is that correct?
Yes, you could look at that in this way. In fact, you might have just invested a new ratio! ;-) However, a more common way to look at the return on stocks is in dividend yield: th-cam.com/video/WaVuP4MRL-o/w-d-xo.html
When doing a valuation, I would start with ROI. Instead, use a "discounted cash flow" analysis, as described in my video on Net Present Value (NPV): th-cam.com/video/Fw5-wccViOM/w-d-xo.html
You're welcome, Hai Lun! Nice to hear that. For better understanding (English is not my mother tongue either, as you probably heard), you can switch on the subtitles as well.
In Invested Capital of Return on Invested Capital (ROIC), is there only bondholder and shareholder? Does the invested capital contain loans/Borrowings/Debt in addition to bondholders & shareholders? Question 2 :- While calculating ROIC,ROE, ROA, ROI, etc . Do we have to divide returns for the current year by the Invested capital-ROE-ROA-ROI of the same year. OR why can't we calculate returns on ROIC-ROA-ROE-ROI : by taking returns for the current year ended & the Invested capital, assets,equity, investments, etc. for the previous year. I.e. ROIC (for year 2020) = returns ( ending 2020)/ Invested Capital (ending 2019); similarly ROA (2020) = Return (2020)/ assets (2019).
Hello Krishan! Question 1: in my view, loans/Borrowings/Debt are included in the category of bondholders. Question 2: the optimal way of calculating them is to take a full year (12 months) of current year returns in the numerator, and take a 5-point average (last year's ending balance, and the 4 quarter-end balances of the current year) for the denominator.
Hello Dharmen! There is a lot of information to review for that. Here's the link to my "How to read an annual report" playlist to get you started: th-cam.com/video/Kw-1nopchnA/w-d-xo.html
Why does equity go down when a company does buybacks? I'm looking at HPQ and they have a negative ROE because they have a negative equity (im guessing because they do a lot of buybacks) but why? And is there a way to calculate ROE when equity is negative due to buybacks?
Hello! Think about the journal entry when a buyback occurs: debit equity credit cash. When equity is negative, calculating ROE is NMF (not meaningful).
Hi, great video but you didn't compare ROA vs ROIC when they both seem very very similar. Assets = equity + liabilities so the denominator is the same ans the numerator is only slightly different. What sets them apart?
Good catch! I do discuss the difference between ROA in ROIC in my ROIC video th-cam.com/video/wLvCmFDEBXc/w-d-xo.html The denominator is different, as people define debt as a subset of liabilities, not as an equivalent to it. Plenty of real-world examples in that video for you to review.
Glad you enjoyed it! Thank you for the kind words. More detailed discussions of each of these concepts in this playlist: th-cam.com/video/bhbDDSohJ84/w-d-xo.html
Companies also publish Quarterly RoE , RoCE, etc. in their quarterly investor presentations which they release along with quarterly Earnings. My question is how do they calculate the Quarterly Denominator value ( Equity, Capital Employed, Invested Capital etc.) on which the quarterly returns are calculated? Do they take annual Denominator value (Invested Capital, Equity, Capital Employed etc.) and divide it by 4 to arrive at quarterly Invested capital, Equity , capital employed etc.?
Hi Krishan! My experience is that companies tend to keep the denominator value the same (i.e. the absolute amount), but for the numerator either annualize by multiplying (Q1 profitability X 4 approximates full year) or take a trailing twelve month number (Q2, Q3 and Q4 of last year, plus Q1 of this year).
@@TheFinanceStoryteller I found the following statement in the notes of the company's investor presentation, related to calculating Quarterly ROCE, ROE , etc. " (1) Q1 FY 21 ratios are calculated based on annualized numbers (2) Pre-tax RoCE is calculated as EBIT/Average Capital Employed. Capital employed is defined as Net Worth + Long Term and Short Term Borrowings + Current Portion of Long Term Borrowing - Cash (3) RoE is calculated as PAT/Average Net Worth".
Interesting notes! PAT = Profit After Tax. These notes you found confirm what I said earlier: they are most likely annualizing the numerator (profitability). See if you can replicate the calculation, I personally always learn a lot from that.
Thank you very much for such a comparison and not plain explanation! I wonder why ROIC and ROA have their denominators written in different way but actually standing for the same thing according to balance sheet equation. What is the point of doing this?
Glad it was helpful, Dima! ROA tries to measure business efficiency, as part of the DuPont equation, and takes the whole left-hand side of the balance sheet (assets) into account. ROIC tries to measure the return for equity and debt holders of the company, and has a more narrow definition of debt by usually taking only the interest-bearing debt into account. The accounting equation states that assets equal liabilities plus equity. The word debt is sometimes used as a synonym for liabilities, and sometimes debt is a subset of liabilities. In the context of ROIC for example, the interest-bearing debt part of liabilities is taken into the calculation, while for example accounts payable and accrued expenses are non-interest-bearing elements of liabilities that are not taken into the calculation. For a discussion of how ROIC is used and defined by companies, see my video specifically on that topic th-cam.com/video/wLvCmFDEBXc/w-d-xo.html
@@TheFinanceStoryteller Thank you for clarifying these technical terms and Dima's question specifically (I had the same question as him). Groetjes uit Belgie!
Is ROCE valid for banking and financial stocks? Because recently I checked the ROCE ratio of top banking stocks of my country & all of them have ROCE in the range of 6%-7%. And what about RoA & RoE ? Can they be used for banking & financial stocks?
I would think all three of those ratios could be applied. However, the best way to find out is to browse through the annual reports of large banking corporations (e.g. some of the ones in the DJIA30) and find out whether they talk about these ratios.
Hi! There is no predetermined sequence of videos, it's up to you to choose what to watch. From my side, I only provide the recommendations through cards that pop up at the top right in videos, endscreens and playlist. For example, this video you watched is part of a playlist called "DuPont analysis" with related videos: th-cam.com/video/bhbDDSohJ84/w-d-xo.html&pp=gAQBiAQB Hope this helps!
I have seen companies whose current assets or liabilities (working capital items) are 10 times greater than the non current assets or liabilities (fixed assets, equity , Reserves, long term debt). Will the return ratios will still be applicable to these companies? For eg. there will be a lot of difference b/w RoA and Return on fixed assets. And what's your view about such companies? Which ratio or financial metric will be best suited to judge these kind of companies where current items are 10-12 times bigger than non current items?
Yes, the return ratios are still applicable, but it's nice to add the "story" behind what is driving these return ratios to your analysis, rather than looking at the ratios "standalone". I have no specific view about companies where current items are 10-12 times bigger than non current items, I would like to know what business they are in, what their vision, mission and strategy is, what their revenue and profitability is, what their revenue growth and income growth versus prior year is, and how they do on cash flow generation. Based on the full picture (not just balance sheet ratios) I would decide whether to invest in them, whether to apply for a job there, etc.
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I like the video but at 3:20 you said and wrote ROA but spelled out Return On Equity.
Thank you for watching the video very carefully, and highlighting the typo. I should have typed (in the PowerPoint presentation that is the basis for the video): ROE (Return On Equity) = ROA (Return On Assets) * leverage.
Thank you from México, easy and clear Knowleage.
Gracia José! Greetings back from the Netherlands. :-)
Hey,thanks for this vid man.I used to use ROE on analyzing a stock,but now ive learnt that ROIC is the complete package thanks to you!
You're welcome! Happy to hear that. The video you watched compares the various RO* calculations, I also have one specifically on ROIC with more examples and comparisons between companies that I think you'll enjoy: th-cam.com/video/wLvCmFDEBXc/w-d-xo.html
@@TheFinanceStoryteller watched it already hehe thanks for the recommendation,btw are you a teacher? What are you doing exactly how can u explain this so well done
I deliver finance and business training at large corporations. Working with employees from entry level to director level to understand the finance vocabulary, and make better decisions that align with the corporate goals. Great fun. Had lots of questions from audiences over the years on various topics, those became the basis for a lot of the videos on the channel. Classroom training is obviously not happening right now, so delivering webinars instead. Planning my first TH-cam-based webinar for next week! th-cam.com/video/LXjrP48Q8Y0/w-d-xo.html
@@TheFinanceStoryteller Wow thats interesting,im really into this stuff and i only learn from youtube/books since im just 18 and waiting on my university experience which is delayed by the corona virus😞.At what chance that webinar is free? Im sorry but i dont quite have the money to pay from my own money.
Webinar will be (paid) members-only, but you can get the idea of the structure of how to approach an analysis of a company by watching some of my other finance case studies: th-cam.com/video/PI9X5Ybek_E/w-d-xo.html
So which one reflects best the potencial for a stock price to go up?
Some people would take ROIC for that, in particular in relation to EVA (Economic Value Added): th-cam.com/video/LHXOIHQcyOw/w-d-xo.html
Historical results for ROIC, ROE, ROA, ROI don't necessarily reflect the potential for future value creation.
Personally, I mostly focus on the potential for a company to generate revenue growth, margin improvement, and free cash flow in the coming years: th-cam.com/video/jG-oXx54qxE/w-d-xo.html
Doesn’t assets = debt + equity so ROIC ≈ ROA？
Almost. Assets = liabilities + equity. Liabilities is a broader term than just interest-bearing debt, it also includes accounts payable, taxes payable, deferred revenue, deferred tax liabilities, etc. In ROIC, companies tend to take only the interest bearing debt rather than the full section of liabilities from the balance sheet. See also my ROIC video: th-cam.com/video/wLvCmFDEBXc/w-d-xo.html
excellent video! Do you think it is important to see these ratios based on the price / book value? If I understand correctly, they are metrics that measure the profitability of the book value (at least the ROE) So for example, if a company has an ROE of 20% but trades at a price / book value of 10 times, I am having a return on my investment of only 2%, is that correct?
Yes, you could look at that in this way. In fact, you might have just invested a new ratio! ;-) However, a more common way to look at the return on stocks is in dividend yield: th-cam.com/video/WaVuP4MRL-o/w-d-xo.html
Great way to deliver the information 👌 subscribed
Welcome aboard!
First of all Thanks but How to calculate sales price from return on investment after tax
When doing a valuation, I would start with ROI. Instead, use a "discounted cash flow" analysis, as described in my video on Net Present Value (NPV): th-cam.com/video/Fw5-wccViOM/w-d-xo.html
I had to watch this video more than once because English is not my mother tongue but you were really helpful! Thank you
You're welcome, Hai Lun! Nice to hear that. For better understanding (English is not my mother tongue either, as you probably heard), you can switch on the subtitles as well.
In Invested Capital of Return on Invested Capital (ROIC), is there only bondholder and shareholder? Does the invested capital contain loans/Borrowings/Debt in addition to bondholders & shareholders?
Question 2 :- While calculating ROIC,ROE, ROA, ROI, etc . Do we have to divide returns for the current year by the Invested capital-ROE-ROA-ROI of the same year. OR why can't we calculate returns on ROIC-ROA-ROE-ROI : by taking returns for the current year ended & the Invested capital, assets,equity, investments, etc. for the previous year. I.e. ROIC (for year 2020) = returns
( ending 2020)/ Invested Capital (ending 2019); similarly ROA (2020) = Return (2020)/ assets (2019).
Hello Krishan! Question 1: in my view, loans/Borrowings/Debt are included in the category of bondholders. Question 2: the optimal way of calculating them is to take a full year (12 months) of current year returns in the numerator, and take a 5-point average (last year's ending balance, and the 4 quarter-end balances of the current year) for the denominator.
Thanks! Great video❤
Happy to help! I applied the concepts to real world concepts in this video: th-cam.com/video/wLvCmFDEBXc/w-d-xo.html&pp=gAQBiAQB
Thanks for the explanation, but, please avoid Red and Blue corner, really Disturbs the attention.
Thanks for the feedback, Touqeer! It was a one-time experiment. ;-)
My absolute favoriete video so far! Playful and easy to understand! BANG!
Thank you! I plan to do more videos in this style. :-)
Nice Video, kindly advice before buying Company Share (Equity), what information & factors we should note
Hello Dharmen! There is a lot of information to review for that. Here's the link to my "How to read an annual report" playlist to get you started: th-cam.com/video/Kw-1nopchnA/w-d-xo.html
Why does equity go down when a company does buybacks? I'm looking at HPQ and they have a negative ROE because they have a negative equity (im guessing because they do a lot of buybacks) but why?
And is there a way to calculate ROE when equity is negative due to buybacks?
Hello! Think about the journal entry when a buyback occurs: debit equity credit cash.
When equity is negative, calculating ROE is NMF (not meaningful).
Hi, great video but you didn't compare ROA vs ROIC when they both seem very very similar. Assets = equity + liabilities so the denominator is the same ans the numerator is only slightly different. What sets them apart?
Good catch! I do discuss the difference between ROA in ROIC in my ROIC video th-cam.com/video/wLvCmFDEBXc/w-d-xo.html The denominator is different, as people define debt as a subset of liabilities, not as an equivalent to it. Plenty of real-world examples in that video for you to review.
This is very clear even for a non-english speaker, regards from Mexico
Gracias! Greetings back from the Netherlands.
Very good explanation! Good succint overview.
Glad you enjoyed it! Thank you for the kind words. More detailed discussions of each of these concepts in this playlist: th-cam.com/video/bhbDDSohJ84/w-d-xo.html
this is excellent video .i could get the concept easy. bang and buck analogy was very good. this video deserves apllause.
That's wonderful, Sivakumar! Your virtual applause is received with gratitude. :-)
Companies also publish Quarterly RoE , RoCE, etc. in their quarterly investor presentations which they release along with quarterly Earnings.
My question is how do they calculate the Quarterly Denominator value ( Equity, Capital Employed, Invested Capital etc.) on which the quarterly returns are calculated? Do they take annual Denominator value (Invested Capital, Equity, Capital Employed etc.) and divide it by 4 to arrive at quarterly Invested capital, Equity , capital employed etc.?
Hi Krishan! My experience is that companies tend to keep the denominator value the same (i.e. the absolute amount), but for the numerator either annualize by multiplying (Q1 profitability X 4 approximates full year) or take a trailing twelve month number (Q2, Q3 and Q4 of last year, plus Q1 of this year).
@@TheFinanceStoryteller I found the following statement in the notes of the company's investor presentation, related to calculating Quarterly ROCE, ROE , etc.
" (1) Q1 FY 21 ratios are calculated based on annualized numbers
(2) Pre-tax RoCE is calculated as EBIT/Average Capital Employed. Capital employed is defined as Net Worth + Long Term and Short Term Borrowings + Current Portion of Long Term Borrowing - Cash
(3) RoE is calculated as PAT/Average Net Worth".
Interesting notes! PAT = Profit After Tax. These notes you found confirm what I said earlier: they are most likely annualizing the numerator (profitability). See if you can replicate the calculation, I personally always learn a lot from that.
What about ROCE ?
Return On Capital Employed! Maybe I will make a separate video on that term.
Truly on of the most comprehensive and well-structured explanations on a finance topic, in the whole world!! Thanks a lot!!
Thank you, Arzu! You made my day with that compliment! :-)
Is there general rule, that this metrics tells us if company stocks would not loose rather then say how much we could potentially gain?
No, there is not. All of these metrics use historical accounting data, none of them can predict the future.
Thank you very much for such a comparison and not plain explanation! I wonder why ROIC and ROA have their denominators written in different way but actually standing for the same thing according to balance sheet equation. What is the point of doing this?
Glad it was helpful, Dima! ROA tries to measure business efficiency, as part of the DuPont equation, and takes the whole left-hand side of the balance sheet (assets) into account. ROIC tries to measure the return for equity and debt holders of the company, and has a more narrow definition of debt by usually taking only the interest-bearing debt into account. The accounting equation states that assets equal liabilities plus equity. The word debt is sometimes used as a synonym for liabilities, and sometimes debt is a subset of liabilities. In the context of ROIC for example, the interest-bearing debt part of liabilities is taken into the calculation, while for example accounts payable and accrued expenses are non-interest-bearing elements of liabilities that are not taken into the calculation. For a discussion of how ROIC is used and defined by companies, see my video specifically on that topic th-cam.com/video/wLvCmFDEBXc/w-d-xo.html
@@TheFinanceStoryteller Thank you for clarifying these technical terms and Dima's question specifically (I had the same question as him). Groetjes uit Belgie!
@@Concojone5 Sometimes the best information is in the comments. ;-) Fijn om ook fans in België te hebben, dat is de max!
Clear and concise explanation. Thank you
Thank you for the feedback! That's what I was hoping for. :-)
Is ROCE valid for banking and financial stocks? Because recently I checked the ROCE ratio of top banking stocks of my country & all of them have ROCE in the range of 6%-7%.
And what about RoA & RoE ? Can they be used for banking & financial stocks?
I would think all three of those ratios could be applied. However, the best way to find out is to browse through the annual reports of large banking corporations (e.g. some of the ones in the DJIA30) and find out whether they talk about these ratios.
How can I follow the sequence of videos
Hi! There is no predetermined sequence of videos, it's up to you to choose what to watch. From my side, I only provide the recommendations through cards that pop up at the top right in videos, endscreens and playlist. For example, this video you watched is part of a playlist called "DuPont analysis" with related videos: th-cam.com/video/bhbDDSohJ84/w-d-xo.html&pp=gAQBiAQB
Hope this helps!
I have seen companies whose current assets or liabilities (working capital items) are 10 times greater than the non current assets or liabilities (fixed assets, equity , Reserves, long term debt). Will the return ratios will still be applicable to these companies? For eg. there will be a lot of difference b/w RoA and Return on fixed assets.
And what's your view about such companies? Which ratio or financial metric will be best suited to judge these kind of companies where current items are 10-12 times bigger than non current items?
Yes, the return ratios are still applicable, but it's nice to add the "story" behind what is driving these return ratios to your analysis, rather than looking at the ratios "standalone".
I have no specific view about companies where current items are 10-12 times bigger than non current items, I would like to know what business they are in, what their vision, mission and strategy is, what their revenue and profitability is, what their revenue growth and income growth versus prior year is, and how they do on cash flow generation. Based on the full picture (not just balance sheet ratios) I would decide whether to invest in them, whether to apply for a job there, etc.
This is awesome, thank you!
Great to hear! Thank you. Just felt the need to take away the confusion around those terms. ;-)