📚 Stock Market Glossary
Clear, beginner-friendly explanations, real-world analogies, and visual formulas for key stock market terminology.
ROE (Return on Equity)
Valuation💡 Key Takeaway: A measure of financial performance showing how efficiently a company turns shareholders' equity into net profit.
Bank Interest Analogy: Starting a food truck with $10k of your own money and earning $2k profit yields an ROE of 20%—way better than 3% bank interest!
😎 10-Second Show-off Pro Tip for Friends!
😎 Show-off Tip: Say, 'Warren Buffett looks for companies with ROE over 15% for at least 5 straight years. That's true compounding power!'
📖 Beginner-Friendly Explanation
STEP 1
Core Concept & Meaning
ROE shows how effectively management uses shareholder equity to generate net profits.
If bank savings pay 3% annual interest, a company with an ROE of 15% is compounding your invested money at 15% every year!
STEP 2
Why It Matters & Mechanism
- High ROE (15-20%+): Exceptional management generating strong compounding returns.
- Low ROE (<3%): Underperforming company earning less than bank deposits.
STEP 3
Practical Investment Tips & Pitfalls
Warren Buffett famously prioritizes companies maintaining an ROE above 15% consistently.
📊 ROE calculation formula
ROE = net profit (KRW 1.5 billion) ÷ equity capital (KRW 10 billion) × 100 = 15%
▶ ROE 15% = Meaning that every 100 won of my money generates a net profit of 15 won every year
⚖️ Key Comparison at a Glance
| Category | A Net Worth Company (High ROE) | B Insolvent company (low ROE) |
|---|---|---|
| Equity (my money) | 10 billion won | 10 billion won |
| Annual net profit | 2 billion won | 200 million won |
| ROE (Return on Return) | 20% | 2% |
| Bank interest rate (3%) comparison | A person with the ability to earn 6.6 times the bank interest | Better to put it in a bank deposit |
⚔️ Don't Mix These Up! (Head-to-Head Comparison)
VSROA (Return on Assets)
View ROA→💡 Crucial Difference: ROE measures return on pure equity (can be inflated by debt leverage), whereas ROA measures operational efficiency across all assets including debt.
VSROIC (Return on Invested Capital)
View ROIC→💡 Crucial Difference: ROE includes idle cash, while ROIC strictly measures how efficiently capital deployed directly into core operating assets generates profit.
📌 Practical Market & Real-World Example
A tech leader sustaining ROE above 15% compounds its shareholder value by 15% year after year without heavy reliance on debt.