How to Measure Company's Effectiveness with ROE?

Return on Equity (ROE) is a tool that helps you to measure how effectively the company is being managed. In other words, ROE measures the company's ability to make use of its assets to generate profits.

ROE = (Net Profits - Dividends / Total Shareholder's Fund) x 100%

In general, the higher the ROE, the more effective the company is at using its resources and the more productive the management team.

TIPS:
Some people consider ROE one of the most important measures of a company's overall financial performance. Simply because you only want to invest your hard earn money in a company that will take good care of your money to maximize the profits.

A company that has a strong management should have a minimum of 10 on its ROE for a period of 5 years. The goal is to look for companies with a rising ROE, greater than 15% and growing. This is one of the Warren Buffett requirement as well.