Investing theory 1 - ROE
Shipbuilding, Lending, and how ROE may be the most important RULE in Investing
Philip ( buy what you understand)
Publish date: Mon, 21 Jan 2019, 11:39 PM
Hi all, I have just landed at a port of call, on an amazing cruise with my dear wife, and it has been a brilliant holiday so far...
Hi, my name is Phillip, and I realized that there is a tool that many investors forget to apply when valuing stocks. I believe it is very very important, and I will try to explain it in a simple way that I hope will be very useful for everyone on I3. Many thanks to Princess cruises for giving me this ephiphany, and I hope to entertain and educate in a simple but useful way.
No one remembers numbers, but a good story never fails to impress.
Imagine if you will a new ship being built. The captain of the boat wants to make a grand ship to travel the world, but he lacks the resources. Therefore, he goes around and promises his sailors and potential passangers a price to build the ship. (IPO) Once that ship is built, the story begins...
Understand the facts of the matter, as the ship travels from port to port in its journey, passangers and sailors will want to pay different prices (market cap/ share price) to take a ride on this ship. However, the ship remains the same (shareholders equity). This does not change, usually. Ships usually stay the same size in the beginning.
However, as the ship travels from port to port, there will be damages and repairs to be made. Sometimes when business is good(share price up), the captain may decide to do upgrade by borrowing money from the port (banks) or the passangers ( dilution, warrants, loans, bonds, share options) All those are bad, but sometimes a cost in the journey of our ship through life. As long as our ship can reach the next port safely, everything is OK! But please note, as I just told my wife a few days ago, the cabin room size doesnt change whether it is measured in feet or meters, so please dont make that mistake in thinking a room in sqft is bigger than a room in sqm (share split)
Now as you know, it takes more effort to move a big ship than it is to move a small one. So, what is the fuel needed to move the ship from port to port? Exactly, this is known as (RETURN OF EQUITY/ROE). Think of it this way would be perfect.
A ship moving fast would have a high return of equity. A ship moving slow would then have a low ROE. Obviously in investment you have to wonder who is paying for the fuel! If it is paid directly from the tickets raised and profits made internally by the ship, then it is obviously a good ROE.
However, if the ROE is generated from an outsized borrowing from the bank or loans or dilution, then even if it is high, this will be obviously a bad ROE.
How one should think of ROE
Imagine 2 small businesses selling popcorn and ice cream on the ship. Imagine you as the captain borrowed money to the sellers to start their business...
For every dollar you borrowed, at the end of the year the popcorn shop makes 5 cents. (ROE=5%) in 7 years, you would roughly 1 and a half popcorn shops.
For every dollar you borrowed, at the end of the year the ice cream shop makes 10 cents. (ROE=10%) in 7 years you would have 2 ice creap shops.
Compound interest really helps in things like this!
How one should apply ROE in business evaluation
Basically using the assumption that business performance is a key indicator via ROE, you can start to see and understand why businesses with low ROE are usually afforded a low PE ratio, while business with high ROE are usually afforded a high PE ratio.
I mean, if you were a passenger on a ship, wouldnt you change to another if you realized the ship wasnt moving?
And if the ship was moving really really slowly... would you even want to buy a ticket?
Cheers, and I hope you learned something
Philip
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Discussions
Be the first to like this. Showing 18 of 18 comments
some examples, previous annual report
RCECAP uses 519 million equity to generate 88 million, ROE of 16.95%
PBB uses 37 billion to geneerate 5.4 billion of profit, ROE of 14.59%
HL bank uses 24 billion to generate 2.6 billion of profit, ROE of 10.83%
In this case you may believe that RCECAP is the stock to buy, until you think about economies of scale, performance on large asset base and the quality of the asset (fuel quality), then you realize the reason why PBB is still the best performer overall.
Simply ask yourself this, if RCECAP increased its loan base to 37 billion and lend it to all the poor people in government office, do you think their roe will still be high? Or will they die to NPL.
As it is, ROE is a strong indicator of business performance, but obviously cannot stand alone. Use your business sense wisely.
2019-01-21 23:57
remember i3 2016...
every young graduate come here to promote their own stocks....value here, value there....cash in bank, PE , NTA, Balance Sheet dissected....where are they today?
all die already la.....
end 2018/2019 is sslee turn
2019-01-21 23:58
Banks, Businesses Brace For Far-Reaching Accounting Standard Changes
ByPYMNTSPosted on October 9, 2018
I would not touch banks just yet.
2019-01-22 00:10
U need understand this loh....!!
1. ROE is a powerful inward looking tools for looking at the quality of investment, but it does not help u to determine whether it is good buy even the roe is high mah...!!
2. Good buy is determine by the reasonable PE or and with earnings growth mah....!!
A good example Nestle has a superb ROE of more than 100% but the company cannot n unable to find good investment to support high ROE returns as a result it pays high dividend loh...!! But bcos of its share price of exceed Rm 140.00 investing in it give u an earning yield of PE 50x or less than 2.6% pa, but yes there is some growth about 10% pa...including this growth will give u less than 5% pa loh..!! Unless u r a fixed deposits holder looking to punt a bit then Nestle may consider investable loh....!!
On the other hand insas The ROE is only 4% pa but bcos its high shareholder fund of Rm 2.54, it generate an eps of rm 0.10, giving an earning yield of 14% pa or pe 6.5x loh basing on share price rm 0.72 loh...!!
This insas is a credible long term margin of safety investment loh..!!
2019-01-22 10:31
you prefer paper financials or real stock profits?
NESTLE ROE 100%, share price 2009-2019 from RM27 to RM147
QL ROE 11.8%, share price 2009 -2019 from 0.6 to 6.9 (post splits)
INSAS ROE 5.6%, share price 2009 - 2019 from 0.29 to 0.72
I dont care about your paper accounting, or you selling at the top and buying at the low, because we both know it is not possible to time the market.
You can keep your margin of safety and your calculations and your paper value. I want to know real cash values, real business performance, capability of a good management.
Buy and hold is not buy and forget. just because I dont panic sell like you and panic buy when finger itchy doesnt mean I dont know your paper logic.
Its like you telling me hengyuan is a good buy when you bought it at 10, sell at 15, then panic buy at 18, then hold with your paper losses until today. I just choose not to buy speculative companies.
Funny investing.
2019-01-22 17:07
What is the diff ?? Profit is profit mah ??
Just like u ask diff of profit earn from manufacturing as an engineer v profit earn for doctor service ?....they are both profit mah...!!
Posted by 10154899906070843 > Jan 22, 2019 05:07 PM | Report Abuse
you prefer paper financials or real stock profits?
NESTLE ROE 100%, share price 2009-2019 from RM27 to RM147
QL ROE 11.8%, share price 2009 -2019 from 0.6 to 6.9 (post splits)
INSAS ROE 5.6%, share price 2009 - 2019 from 0.29 to 0.72
I dont care about your paper accounting, or you selling at the top and buying at the low, because we both know it is not possible to time the market.
You can keep your margin of safety and your calculations and your paper value. I want to know real cash values, real business performance, capability of a good management.
Buy and hold is not buy and forget. just because I dont panic sell like you and panic buy when finger itchy doesnt mean I dont know your paper logic.
BTW
Its like you telling me hengyuan is a good buy when you bought it at 10, sell at 15, then panic buy at 18, then hold with your paper losses until today. I just choose not to buy speculative companies.
BTW WHAT HAPPEN TO HENGYUAN COULD HAPPEN TO UR QL TOO, IT ALREADY HAPPEN TO YOUR TOPGLOVE ALREADY WITH SUDDEN FALL IN SHARE PRICE MAH...!!
INSAS IS NOT A SPECULATIVE STOCK, IT HAS HUGE NETT CASH HOLDING & HUGE DISCOUNT TOO ITS CURRENT SHARE PRICE MAH...!!
U CAN SLEEP WELL INVESTING ON INSAS, BCOS OF ITS UNDERVALUATION & GIVE DECENT DIVIDEND YIELD MAH...!!
2019-01-22 17:16
whats the difference? if you sell the stock what do you get? dividend and share sales gains.
if you sell insas shares? you get nothing from your so called "profit".
2019-01-22 19:09
U understand what insas give better than Ql share leh ??
1, Dividend ...the lifeblood of investment...insas give 3% pa yield but Ql only give tiny less than 1% yield mah...!!
This is what the tangible thing that insas is much more superior than ur Ql loh.....!!
2. btw after u sell insas or ql share...the scenario u get, either profit or loss...does this show owning insas n ql, u get the same consequence leh ??
Pls don make a big deal owning QL compare to owning insas loh...!!
Posted by 10154899906070843 > Jan 22, 2019 07:09 PM | Report Abuse
whats the difference? if you sell the stock what do you get? dividend and share sales gains.
if you sell insas shares? you get nothing from your so called "profit".
2019-01-22 19:51
you can definitely keep you 3% dividend, while your stock price keep dropping. Its definitely a good deal I guess. I prefer long term stock price performance.
To each his own.
2019-01-22 21:51
U r over zealous loh....!!
Can u point to me how u derive insas share price is dropping leh ??
In fact based on latest reading insas is still ahead of QL mah...!!
U can prefer anything long term performance loh...!!
But the fact is right now ur QL lagging mah...!!
Talk no use mah....!!
If Ql is not performing pls don talk is if u r a champion loh...!!
Posted by 10154899906070843 > Jan 22, 2019 09:51 PM | Report Abuse
you can definitely keep you 3% dividend, while your stock price keep dropping. Its definitely a good deal I guess. I prefer long term stock price performance.
To each his own.
2019-01-22 22:02
>>>10154899906070843 you prefer paper financials or real stock profits?
NESTLE ROE 100%, share price 2009-2019 from RM27 to RM147
QL ROE 11.8%, share price 2009 -2019 from 0.6 to 6.9 (post splits)
INSAS ROE 5.6%, share price 2009 - 2019 from 0.29 to 0.72
I dont care about your paper accounting, or you selling at the top and buying at the low, because we both know it is not possible to time the market.
You can keep your margin of safety and your calculations and your paper value. I want to know real cash values, real business performance, capability of a good management.
Buy and hold is not buy and forget. just because I dont panic sell like you and panic buy when finger itchy doesnt mean I dont know your paper logic.
Its like you telling me hengyuan is a good buy when you bought it at 10, sell at 15, then panic buy at 18, then hold with your paper losses until today. I just choose not to buy speculative companies.
Funny investing.
22/01/2019 17:07>>>
Mr 1015 I believe you when you shared you have been holding QL for many years.
Of course, I have Nestle for many years too.
I cannot even tell if raider has Insas or if he has, he has held this since 2009. Given his activity in the market of jumping in and jumping out of stocks (Hengyuan is a case in point), how are you going to have even a meaningful discussion with him?
Honesty is a very expensive gift. Don't expect this from cheap people.
2019-01-22 22:40
Based on Hengyuan situation what are the lessons we can learn from there leh ??
People like 3iii & Mr Long are unsuitable to advise u on this loh, bcos this people like driving cars, can only drive the car forward, but they don know when to tell u to brake and do reverse gear ala "LARI KUAT KUAT WHEN THINGS DON TURN UP RIGHT" MAH...!!
Lessons
Pls do not trust growth in EPS and low PE so much loh...!! Earnings can unexpected collapse very fast anytime loh...!!
The margin of safety based on Earnings and growth is very volatile like the case of Hengyuan PE 5x v Nestle 50x and Ql 50x, in addition Hengyuan growth 200% v Nestle & Ql growth less than 20%....u thought Hengyuan got very big fat margin of safety based on earnings and growth...but this type of margin of safety based on earnings can collapse and disappear very fast loh...!!
In fact this condition of collapse again confirmed by the recent collapse of padini and topglove, share price fall drastically recently bcos of earnings disappointment again mah...!!
So do not listen to conman 3iii asking u all to buy NESTLE Pe 50x or high growth stock at lofty valuation....anytime the earnings can collapse very fast without warnings like what happen to hengyuan, topglove and padini loh...!!
Thats the reason why Ben Graham in the intelligent investor book, do not give too much emphasis on investment based on margin of safety using earnings based on profitability and growth route, but he prefer to use margin of safety based on huge discount on tangible assets and huge cash liquidity of the company with the huge share price discount bcos this tenet is less volatile & tangible and esy to employ loh...!!
It is not that u cannot invest based on growth and earnings route, in fact raider would encourage u do it bcos it is highly profitable loh...anyhow if u invested in hengyuan earlier, u will had made a huge profit unseen for many years, but u must act smart & be prepare to lari kuat kuat loh...!!
People like 3iii & Mr Long are unsuitable to advise u on this loh, bcos this people like driving cars, can only drive the car forward, but they don know when to tell u to brake and do reverse gear ala "LARI KUAT KUAT WHEN THINGS DON TURN UP RIGHT" MAH...!!
Raider is right to advice u to lari kuat kuat on hengyuan...in fact everyone should learn how to lari kuat kuat ....when condition & environment does not look right mah...!!
2019-01-22 22:50
Ok, can I lari kuat kuat from you? You are pretty toxic keep polluting every thread with your repetitive INSAS ideas. Best is if you move to INSAS thread and post everyday. I surrender, can't beat your long term investment strategy of 2 weeks say insas performance better than QL. Can you stop drowning everyone else with your spam and capslock. I get it, you are master of margin of safety. You have made millions doing your strategy.
Can we move on? I'm tired of listening to old broken record.
2019-01-23 01:12
Thats fine with me to have truce loh...!!
Just a correction...the fire started 1st by u by belittling value investment & insas the value investment proxy mah...!!
I don mind u continue emphasis ur growth investment, thats is your core competence mah, but instead u rundown on other people value investment system mah...which raider think is false bcos u have lacked of understanding on this area loh..!!
Raider don want u to mislead practioner of value investment as a rubbish system bcos the mechanism of this investment has been proven to be successful by highly famous investors for many years loh....!!
Remember there are many ways to skin a cat in order to make monies and your way and my way are not the only way loh..!! Lets be broad minded mah....!!
If u decide that ur way is the best just stick to it n emphasis the positive aspect of it and share with us loh...!!
Posted by 10154899906070843 > Jan 23, 2019 01:12 AM | Report Abuse
Ok, can I lari kuat kuat from you? You are pretty toxic keep polluting every thread with your repetitive INSAS ideas. Best is if you move to INSAS thread and post everyday. I surrender, can't beat your long term investment strategy of 2 weeks say insas performance better than QL. Can you stop drowning everyone else with your spam and capslock. I get it, you are master of margin of safety. You have made millions doing your strategy.
Can we move on? I'm tired of listening to old broken record.
2019-01-23 10:58
wow, this F&N also potential to ROE now 17.35 to rise to 100 in the future... keep giving dividend when price is 100 + like Nestle.. potential...
2019-02-26 15:56
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and the most important determinant of the ticket price is reputation.....and next, a good story to tell.
2019-01-21 23:47