Investing in stocks and shares is all about research and analysis. The more you do, the better you’ll become at recognizing good investment opportunities and (hopefully) the more profit you will realize. Analyzing and researching investment opportunities is a long and arduous task. It is for this reason that advisory accounts are so popular amongst investors. Advisory accounts offer investors access to the analysis and research carried out by experienced analysts and brokers. Clients are still required to manage their own risk and make their own investment choices but having a professional to turn to is often a great help. Even if you do hold an advisory account, it is useful to have some knowledge and understanding of portfolio theory so as to better understand your investments and how to make the most of them. Portfolio theory has changed a lot over the years and will no doubt change even more in the future. It is worth, every so often, reading over news pieces or text books about portfolio theory to make sure that you are up-to-date and that you are doing everything you can to make the most of your investments.
COMPANY PERFORMANCE
Before you invest in a company, it is good to know exactly how the company is performing. The problem is that there are a variety of different ways that you can try and measure a company’s future prospects. None of these methods are guaranteed to give you a genuine insight into the company’s performance. Analyzing the results of a number of these indicators may give you a good indication of how the company is performing in a very general sense. The more research you do and the more indicators you compare, the more reliable your findings will be.
ROE
ROE or Return on Equity is the most common measure of a company’s performance used by analysts and investors. ROE measures the rate of return on the shareholder’s equity. It shows how well a company uses invested funds to generate earnings growth. ROE is judged against the rest of the sector and the cost of capital in that sector. Therefore a Return on Equity less than the cost of capital is considered destructive. Despite its popularity, measuring a company’s performance using ROE is not without its draw backs. Companies can artificially create a healthy ROE (for a time at least) by leveraging debt and buying back shares using accumulated funds. This can leave a healthy ROE calculation whilst company performance is actually in a slump. Companies are keen to maintain a healthy ROE due to its popularity as an indication of performance. A dip in ROE could result in a dip in share prices and a loss of investor confidence in the company. It is for these reasons that we suggest considering a number of different indicators when considering an investment.
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