1. Which industry have greater ROE & why?
ROE (Return on equity)
It measures a firm’s efficiency at generating profits from every unit of shareholdersequity .Of all the fundamental ratios that investor look at, one of the most important isreturn on equity, and it’s a basic test of how effectively co. management uses investor’smoney.It is a measure of a corporation’s profitability that reveals how much profit a co.generates with the money shareholders have investedCalculated as,
ROE= Net IncomeShareholder Equity
Also known as “Return on net worth (RONW)”.ROE is useful for compairing the profitability of a company to that of other firms in thesame industry.What is more important than a greater singular ROE is consistency in past are far morelikely to do so in the future.
Some industries have high ROE because they require no assets,such as consulting firm
Some industries require large infrastructure builds before they generate penny of profit such as oil refiners.
Such industry requires are capital intensive industries, sothey will have low ROE.
less capital intensive assets & liabilities so high ROE
:This companies with low debts often post high ROE numbersdue to high profit margins, not high debt levels
Service sector Co.
: Have high ROESo we cannot conclude that consulting firm are better investments than refiners just because of their ROE.
Generally capital intensive businesses have low ROE