what is return on equity? What is the formula for return on equity ratio? How do we analyze and calculate the return on equity ? In this video, we will be showing you the return on equity ratio to helps you in evaluate a stock or a business. Return on equity is by far the best investment terms or financial ratio in determining the stock and company as it does not value based on the stock performance but rather evaluate based on the company performance. In value investing like Warren Buffett, we would like to understand the operation of business and return on equity helps us in doing so. Return on equity has the formula of net income divided by the shareholder's equity. It measured the effectiveness of the operation of a business. A company with higher return on equity ratio is more favorable as it indicate the more effective the company in generating the profit. However, a very high return on equity is not common and its indicate the business is having huge debt. That's is why in value investing, we keep mention and focus on the low debt to equity ratio when evaluating a stock. Return on equity can be used together with others ratio. Example are like the price to earnings ratio. The best scenario for a stock is having a high return on equity but low price to earnings ratio. This indicate the financial status of a company is strong and healthy. In most of the cases, we will be comparing the return on equity ratio of a stock with the S&P 500 index. If the return on equity is higher than the stock market index, it means the company is outperform the market with the effectiveness in generating the profit or earnings. Return on equity is the favorite number of Warren Buffett. Warren Buffett likes the company with higher growth rate. He will avoid the company which will not grow. If the company generating profit more effective than others company, this company will have a higher retained of earnings which will help them in growing their business. A higher retained earnings makes higher money available for them to expand their business. Subscribe for more investment terms and follow us on our facebook page. https://fb.me/roadtoinvest999 We emphasize on the essence of value investing