Showing posts from February 10, 2013

Stock Selection: The most important number

Invest in companies where the management ensures the highest return on the invested money
I strongly believe that the single most important number, at least for me, when considering investment in stocks, is return on equity or RoE (this is the number that Moneylife relies on the most, though we look at other parameters too.—Editor). It is essentially profit after tax (PAT) expressed as a percentage of the total net worth (or shareholders’ funds, as the Americans refer to it). In simple words, it tells me how efficiently the company uses shareholders’ money and how much it earns with that money. All other things—market share, brand value, corporate governance, competencies, etc—are secondary. If a company is good, its numbers should ultimately get reflected in superior earnings.

No one wants to invest in a company that makes the right noises, but does not earn enough ‘bang on the buck’, as they say. One of the first things I look for is that RoE, in the Indian context, should not be le…