Six useful indicators
The appropriate range varies by industry, especially for banks and other financial firms.
- ROE: profit produced from shareholders' equity; leverage can inflate it.
- Equity ratio: the share of assets funded by equity.
- Operating cash flow: cash generated by the core business.
- Free cash flow: cash after investment, available for debt repayment, dividends or growth.
- Interest-bearing debt: compare borrowing with cash, earnings and cash flow.
- Current ratio: a supplementary view of short-term liquidity.
Screen and verify
A starting screen might combine ROE of at least 10% with an equity ratio of at least 60%. Then inspect profits, cash flow and debt trends, compare peers and consider industry-specific balance-sheet needs.
Warning signs
High ROE accompanied by rapidly rising debt, recurring negative operating cash flow or weak liquidity deserves caution. A single year's figures cannot establish durability.
Market and financial data may be delayed. Verify original company filings and make your own investment decisions.
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