How can you use return on equity (ROE) in Technical Analysis?

In Technical Analysis, use Return on Equity (ROE) to gauge a company's profitability and potential growth. Higher ROE may indicate a stronger stock, while declining ROE might signal caution. Compare ROE across similar companies to assess relative performance and make more informed investment decisions.

ROE is basically a fundamental metric. I usually select companies with: 1. ROE greater than 15% (since in India, the cost of capital is around 11-12%) and 2. Debt to Equity < 1. Then we can use technical indicators to identify the correct entry levels. Say for example if a company with ROE > 15 and debt to equity < 1 is constantly taking support at 50EMA or 200 EMA then that would be a good time to buy that stock.

ROE is quite easy to calculate & it gives us the understanding of the quality of business. Investors often consider just ROE of a company to make their investment which is not right, i think ROE Consistency gives us the real picture/ quality of a business.

ROE being a fundamental indicator can be used as a filter to sieve leaders in the pack and then Technical Analysis helps in understanding strength in the motive move, possible entry levels etc. That said, it is believed that the stock price incorporates all fundamentals into the price so will expect ROE to be typically priced in.

Return on Equity is how efficiently the company is able to generate the return on the capital of Equity Stakeholders - Actual owners of the company). (For every dollar of equity that shareholders invest in a business, what is their annual flow of income) If we dig deeper higher the numerator here is Profit After Tax (PAT) that is the operating profit, higher the ROE. To understand which factors actually contribute to higher ROE, Dupont Framework comes into existence - Factor 1 - Profitability - Net Profit - NP/ Revenue Factor 2 - Productivity - Asset Turnover - Revenue/ Assets Factor 3 - Leverage - Assets/ Shareholders Equity Analysing the above factors individually, we can exactly see where the company is performing efficiently.

ROE may also be used in technical analysis to determine a company’s growth potential. Rising ROE over years consistently could be another signal of effective management and ability to produce higher returns on shareholder’s money. This information can be useful for technical analysts aiming to find stocks with growth potential and positive momentum.

ROE fails to measure value creation. Manipulability of ROE and its inherent structural flaws contribute to its limited efficacy in explaining divergences in valuation. As we see so often in the market, simplicity is not always a virtue. Although ROIC might entail a more complex calculation, it proves to be a superior indicator of both profitability and valuation.

Understanding ROE in Assessing Company Growth Return on Equity (ROE) serves as a key indicator in technical analysis, particularly in assessing a company's growth potential. By tracking ROE trends over time or across sectors, investors can gauge a company's ability to grow earnings and reinvest them effectively. A rising ROE typically indicates a company's improving performance and potential for future growth. However, it's vital to recognize ROE's limitations as a growth indicator, such as diminishing returns, cyclical earnings, and external influences like competition and regulation. #FinancialAnalysis #ROE #CompanyGrowth

Tracking ROE trends offers insights into a company's growth trajectory. A rising ROE? Potential for greater earnings ahead. But it's not all about the climb. Beware the risks—scale's diminishing returns, earnings' cyclical swings, and disruptive external forces like new market entrants or regulatory shifts. ROE is a piece of the puzzle, not the whole picture. When you evaluate ROE, do you weigh these factors? What's your approach to mitigate risks?

Um motivo prático da necessidade da diversificação é considerarmos que a economia é cíclica e, dependendo do cenário macroeconômico global, incluindo a política monetária, algumas empresas, mesmo que possuam ROEs médios menores podem ser beneficiadas e sobrevalorizadas em detrimento a outras empresas e setores com ROEs históricos maiores.

Technical analysts frequently use ROE as a factor to consider in the development of diversified portfolios. Analysts can create a balanced selection of high-return and stable return investments by including stocks with different levels of ROE. It is possible to manage the risk and enhance portfolio performance by diversifying on ROE.

You can compare ROE on a standard deviation basis. On bloomberg, one can plot out the ROE and see whether it is one, two standard deviations below or above its mean on a 1, 3 or 5 year basis. Then you can see if the company is too expensive or cheap in that sense. That's how one can interlace fundamental ratios and evaluate from a technical analysis perspective.

ROE isn't just about earnings; it's a compass for diversification. By aligning your portfolio with a spectrum of ROE levels, you balance risk and fine-tune asset allocation. Mix it up—combine varying ROE stocks for a portfolio that captures growth and tempers volatility. Remember, diversification is personal. Adjust for your goals and risk appetite, and keep a vigilant eye on how these pieces fit together.

O uso do Return on Equity (ROE) na análise técnica pode ser integrado à estratégia de diversificação do portfólio, proporcionando equilíbrio entre risco e retorno. Ao diversificar com base em diferentes faixas de ROE, os investidores podem criar uma carteira que reflete diversos trade-offs de risco-recompensa e oportunidades de crescimento. A inclusão de ações com ROEs variados contribui para mitigar riscos associados às flutuações no desempenho financeiro. No entanto, é crucial ajustar a estratégia de acordo com metas, horizonte de tempo e tolerância ao risco, monitorando continuamente o desempenho e a correlação dos componentes da carteira para garantir uma diversificação eficaz.

Combining Return on Equity (ROE) analysis with technical indicators can provide a more comprehensive approach to stock selection and investment decision-making by combining the two methods: 1. Start by identifying companies with high or improving ROE. 2. Apply technical analysis tools to these stocks, mainly trend indicators like moving averages, momentum indicators such as RSI or MACD, and volume analysis. 3. Confirmation analysis: Use technical indicators to confirm the strength of stocks with high ROE. 4. Divergence Analysis: Check for positive/negative divergences between the ROE and technical indicators. 5. Broaden the analysis by applying sector ROE analysis/sector technical indicators and check for divergences and confirmations.

O ROE deve ser comparado com outros indicadores que permitam entender como ele foi formado. É importante dissecar o ROE desde a produção da receita, passando pelos custos, resultado operacional, endividamento e assim por diante. A pura comparação do ROE entre empresas, negligenciando sua qualidade, pode levar a decisões equivocadas.

You can define via back and forward testing ROE stats for a trading system based in a specific pattern and compare those stats between different patterns.

A integração do Return on Equity (ROE) com padrões gráficos na análise técnica fornece uma abordagem para identificar oportunidades de negociação com base no histórico do desempenho financeiro e na relação entre ROE e preço das ações. A observação de padrões gráficos, como rupturas ou reversões associadas a mudanças no ROE, pode indicar alterações significativas no sentimento do mercado. No entanto, é crucial validar esses padrões usando ferramentas adicionais, como linhas de tendência e níveis de suporte, e considerar o contexto geral da empresa e do mercado para uma análise mais completa e informada.

Analyzing ROE is a very good way to confirm a pattern or a trend. It is also important to compare the ROE vs other similar companies or the industry average to check how good the ROE is. If you are evaluating a chart it is important to consider other factors, taking only one indicator to make a decision means an unnecessary risk. I personally check the ROE behavior among other indicators on at least a 18-24 month tenure.

My question is: can ROE be identified in a market movement pattern? It can't, can it? In that case, it is a good variable to filter assets, but in my point of view, it does not apply to technical analysis directly, but indirectly.

ROE allows traders to assess a company's profitability and efficiency and can be used as a leading indicator for stock performance. Also, it can provide a more comprehensive approach to stock selection and investment decision-making. A robust and increasing ROE may suggest potential bullish opportunities but it's vital to contextualize ROE within industry benchmarks and the company's historical performance. The historical correlation between price fluctuations and ROE is significant in financial analysis.

Let's remember what technical analysis means: the study of charts and patterns of behaviour. ROE, being a relevant measure in the analysis, I do not think it has a technical analysis reference, however, it can be integrated as a filter when selecting companies that meet X ROE criteria or other profitability measures along with other filters. From there, the filtered companies can be used for technical analysis. I cannot conceive of any other way of integrating ROE into technical analysis.

In technical analysis, Return on Equity (ROE) is often used as a fundamental financial metric rather than a technical one. It measures a company's profitability relative to its equity. Technical analysis typically focuses on price trends, volume, and other market indicators rather than financial ratios like ROE. If you're interested in fundamental analysis, ROE can help assess a company's financial health, but for technical analysis, consider using charts, patterns, and indicators to make trading decisions.

Por fim, cabe ressaltar que devemos sempre levar em consideração as condições do mercado e setoriais ao interpretar um ROE. Muitas vezes, setores específicos tem padrões diferentes. Além disso, a política monetária (contracionista ou expansionista) vigente no país, e num mundo cada vez mais globalizado, acaba tendo impacto direto no retorno sobre o patrimônio das empresas, ao longo desses ciclos.

Echoing the insights of numerous contributors, Return on Equity (ROE) serves as one piece of fundamental analysis, enabling the identification of stocks with robust fundamentals during the screening phase. Subsequently, the operational stage unfolds, focusing on trading strategies and execution, where technical analysis could be used to guide trading decisions.

Os indicadores como o ROE e suas associações são muito importantes para a tomada de decisões em relação a compra ou venda de um ativo. Obviamente o cenário macroeconômico e os fundamentos futuros das empresas são fatores que trabalham em conjunto. Quanto mais conhecermos a empresa e seus indicadores, maior a chance de termos retorno sobre o capital alocado nela.

Em resumo, o Return on Equity (ROE) é uma métrica crucial para avaliar a eficiência financeira de uma empresa. Sua aplicação na análise técnica, seja comparando com médias setoriais, incorporando a padrões gráficos ou na estratégia de diversificação, oferece valiosos insights para investidores. Entender o ROE é fundamental para avaliar a capacidade de uma empresa em gerar lucros a partir do capital dos acionistas. No entanto, é importante integrar o ROE com outras métricas e fatores contextuais para uma análise mais completa e precisa. Em última análise, o ROE permanece como um indicador valioso na tomada de decisões de investimento, proporcionando uma visão abrangente da saúde financeira das empresas.

Most important here is ROE level remains sustainable in the long term and aligns consistently with the company's capital structure. Similar as often happens with EBITDA as a proxy for cash flow when cash flow conversion is low, one should be wary of getting misled by ROE: 1. Off-Balance sheet items are ignored. 2. Unlike ROE, ROIC removes the impact of unusual one-time charges, hidden off-balance sheet items, and financial leverage to calculate the true profitability of a firm. 3. ROE can be a result of financial chicanery due to non GAAP metrics that companies often use to set performance targets for executives’ annual and long-term bonuses. 4. ROE fails to measure value creation.