Getting Your Money's Worth: Screening for Return on Equity
by Wayne A. Thorp
Return on equity (ROE) is a popular measure of profitability and corporate management excellence. The simplest method of calculation is to divide earnings for the last four quarters (trailing 12 months) by shareholders equity. This relates earnings generated by a company to the investment that stockholders have made and retained within the firm. The latter figure—stockholders equity—is equal to the total assets of the firm less all debt and other liabilities of the firm and represents investors ownership interest in the company. On the balance sheet, it is the sum of preferred stock, common stock, and retained earnings.
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