Selecting Good Companies (ROE, PB and PER)

[mrEngineer]

I guess u guys are right. There will be very few of such companies as there will be no point for them to list anyway. It's equivalent to giving free cash to shareholders.

[vader1671]

Digging up a old post to discuss something that came across my mind. As we frequently advocate stable consistent and high ROE as an indicator of company performance and can be used as a method to shortlist good companies., how about we use FCFE / Equity instead? The reason is because Income figures are often manipulated and sometimes can create extreme values of ROE. If we use FCFE instead, we can say that operating cashflow can be less manipulated and it can be used to assess extremely stable cashflow companies.

Any comments?

I would caution against exclusively using ROE. It is an excellent measure if you want to compare companies across industries and sizes, however, there is one small problem.

Equity includes liabilities. It is the measure of how good a company uses its resources. A fantastic ROE "should" mean that the company can afford to gear up as much as possible, since it's return on debt is better than the debt's interest rate.

But I'm pretty sure we all know how that scenario can end up.

I would recommend using ROE in conjunction with ROA. ROA figures are usually lower since it only considers the company's assets and strips out the liabilities. A huge gulf between the ROE and ROA means that the company is basically running on debt.

A good ROE (I use >20%) and a good ROA (10%-15%) basically means a gold mine of a company.

Just my 2 cents.