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Home > Brief Guides > Fundamental Analysis

Guide to Fundamental Analysis (Part 2)


D. Book Value Per Share

The formula is:

Total Shareholders' fund divided by number of shares outstanding

Book value is a crude measure of the net worth of a company. As an accounting measurement, this may be the approximate liquidation value of the company should it be liquidated. A more precise measurement would include the current market value of the company's assets.

E. Net Return on Equity (ROE)

The formula is:

Net profit divided by total shareholders' funds

It is used to measure the rate of return on the shareholders' investments. For example, if a company's net ROE is 20%, this indicates that for every $1.00 invested by the shareholders, the company is generating 20 cents in return. Some analysts think that analyzing Net ROE is more useful than using PE ratio. However, a company with high borrowings may be able to generate an impressive Net ROE. The shareholders funds may also be affected by rights issues and or mergers and acquisitions. In such cases, the total shareholders funds could be an average figure.

F. Return on Assets (ROA) & Return on Capital Employed (ROCE)

The formula is:

Net profit divided by total assets

It is useful as an indicator of the ability of the management in using the company's assets to generate income. Related to this useful indicator is Return on Capital Employed ( ROCE ), probably the most important indicator in assessing the quality of a company's management. The underlying concept behind ROC is similar to ROA.

Using an indicator in isolation can be misleading. In analysing an Internet company, for example, calculating its book value is rather meaningless. As with technical analysis, a ratio or indicator must be used with other indicators to give a more complete picture. Putting them all together is necessary and needs experience and judgement.

The above is only a very short brief. Subscribers who want to pursue it further, something thati Capital® very strongly recommends, can find plenty of books in most bookshops.

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