The return on equity can be calculated as :
Net income for the latest year divided by Shareholders’ equity
The return on equity is a very important metric for investor. It tells an investor if there is a sufficient return on equity and whether the company is creating value for shareholders.
In general, a company with a return on equity greater than its peers mean that it is enjoying some form of competitive advantage that allows them to make more profits than its peers when measured against the shareholders’ equity.
Complement the return on equity metric with the return on assets metric
Besides looking at the return on equity, one should also complement that with studying the return on assets which measures how effectively a company is investing its money.
How option traders can use this metric?
Option traders can look out for companies earning an above return on equity as compared to the peers. In the absence of any broad market movements to the downside and if the stock’s price is attractively priced, option traders can consider using mildly bullish to bullish strategies.