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When
looking for a company to invest in, what should you look for? One
easy to calculate tool is Return on Equity (ROE). ROE looks at the
profitability, asset management and financial leverage of a
company. Considering this, ROE helps the investor evaluate the
type of return expected, as well as management?s ability to run
a company. More
on ROE as a screener below. Also, find
the latest events from Acorn
Energy (ACFN),
Advanced
ID (AIDO),
and Tetra Tech (TTEK).
ROE is calculated by taking a
year's worth of earnings and dividing them by the average
shareholder's equity for that year. You can find earnings from a
company?s SEC filings. There are many methods of coming up with
an annual average:
- Look at the
previous annual statement
- Use the four
most recent quarterly reports
- If less the
four quarters are available, annualize the available reports
- Average a
series of annual reports
Try to select the method which best
fits the company you are looking at. Are they a new company or
have they been around for many years? Has their business model
significantly changed recently? Are they a seasonal business? All
of these should be taken into account when determining the annual
earnings.
Shareholder?s equity can be found
on the balance sheet and is simply the difference between the
total assets and total liabilities. This represents the assets
that have actually been generated by the business. A high
shareholder?s equity usually represents a sound investment,
where investors could see a substantial payback. For example, if
there is a ROE of 25% then $0.25 of assets are generated for each
dollar invested.
The ROE allows you to quickly
determine if a company will generate assets or just continue to
seek investment dollars to maintain operations.
Let's take a closer look at the
calculation of ROE and see how it incorporates the profitability,
asset management and financial leverage of a company.
Profitability
can be determined by dividing one year?s earnings by one
year?s sales. Profit margin is the amount remaining after
paying all of the costs of running the business. Management
that increases profit margins is controlling costs either by
squeezing efficiencies out of the business or cutting out
unprofitable ventures. Although management can cut costs too
far ? bleeding out necessary research and development
spending, for instance -- for the purposes of analyzing the
ROE generated by a business, a higher profit margin means a
higher ROE.
Asset
management can be determined by dividing
one year?s sales by assets. Asset management is probably one
of the factors individual investors have the most difficulty
using to evaluate a company. Certainly you can compare various
asset management ratios for companies within an industry. How
can you tell if so much in sales per dollar of total assets is
good or not so good for a given company on more than just a
relative basis? Looking at asset management in the context of
the total ROE allows the investor to balance a company's asset
management ability with its profit margins and the financial
leverage employed in order to discern whether the actual
business is great or simply mediocre.
Financial
leverage can be determined by dividing
assets by shareholder?s equity. A lot of people want you to
believe that financial leverage (debt) is no good. Most of
those people apparently buy everything with cash. For the rest
of the world, debt is much like anything else -- okay in
moderation, but overdoing it is not a good idea. As anyone who
has ever had a high credit card balance can attest, debt tends
to feed on itself, growing to enormous proportions with very
little food and watering. When a company takes on debt, it
increases the total amount of capital it has at its disposal
to finance whatever it is it wanted to finance in the first
place. Unlike equity, debt carries a direct cost called
"interest" that eats away at a business's
profitability. Sure, if you take on $500 million in debt you
can suddenly produce 1,200 more widgets a day. However, your
profit margins on the extra widgets plummet to 5% from 10%
because the interest on the debt costs you 5%, meaning that
the additional gain becomes incremental.
If you multiply the formulas for
profitability, asset management and financial leverage you are
left with:
One
Year's Earnings Divided by Shareholder's Equity, which is Return
on Equity.
These three factors are what
managing a company is all about. Those who successfully juggle
these realize a high ROE, distributing earnings to investors.
There are numerous other factors
that should be considered before making an investment but since
today we are talking about ROE and since we also specialize in the
small-cap arena. Here are four small-cap companies that currently
have an attractive ROE.
Knoll
Inc. (NYSE: KNL) has an ROE of 122%. Operates as a
designer and manufacturer of branded office furniture products,
textiles, and fine leathers.
Tempur-Pedic
Inc. (NYSE: TPX) has an ROE of 83%. Manufactures and
distributes mattresses and pillows.
Darling
International Inc. (NYSE: DAR) has an ROE of 34%.
Is the largest publicly traded, food processing by-products
recycling company in the United States.
Blackbaud
(Nasdaq: BLKB) has an ROE of 37%. Is the leading
global provider of software and services designed specifically for
nonprofit organizations, enabling them to improve operational
efficiency, build strong relationships, and raise more money to
support their missions.
Acorn
Energy (Nasdaq: ACFN) Making
the World a Better Place by Improving Efficiencies of the Electric
Grid and Reducing the Energy Sector's Environmental Footprint.
Investor
Presentation: Acorn
Energy's Investor Presentation
Acorn CEO John
Moore's presentation at the Merriman Curhan Ford's Investor Summit
in San Francisco.
Fast
Company Article:
Local
Power Takes on PG&E
Activist-turned-entrepreneur
Paul Fenn's effort to bring affordable sustainable energy to
California could be revolutionary -- and electricity giant
PG&E isn't happy about it at all.
For more information on ACFN visit
here
Advanced
ID Corp. (OTCBB: AIDO) AIDO
currently supplies more than 3,000 organizations, including animal
shelters, veterinarians, breeders, government agencies,
universities, zoos, research labs and fisheries with RFID devices
for companion animals.
Press
Release: Advanced
ID Subsidiary Secures New Sales Channel
Pneu-Logic will
supply and integrate its RFID technology and FastCheck Software
with the tire manufacturer?s business
practices.
Press
Release: Advanced
ID Inks Acquisition Letter of Intent in China, Bolsters Market
Penetration in Region
The Company has
signed a Letter of Intent to acquire the assets of a prominent
RFID Technology company based in China. With the acquisition, the
Company continues its corporate strategy to expand throughout Asia
and becomes the only US public company with instant access to the
Chinese domestic market for RFID products and services ?
the single largest in the world.
For more information on AIDO visit
here
Tetra
Tech (Nasdaq: TTEK) Has
Over 275 Offices Worldwide.
Press
Release:
Tetra
Tech Awarded $50 Million U.S. Navy Biological Resources Contract
For more information on TTEK visit
here
These profiles and much more available at our site
here.
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currently owns seventeen hundred shares of ACFN bought in the open market.
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APS for its efforts
in presenting the Advanced ID Corp. profile. SCR owns three hundred
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