Many investors track ROE but diversifying metrics used can aid in balanced investment decisions

WITH the long hoped-for US Federal Reserve rate cut likely to materialise after next week’s meeting, companies are looking forward to some relief in terms of lower financing costs.

Among other positive benefits could be a boost to equity markets. Return on equity (ROE) is an important metric, showing how effectively a company is using its capital to generate returns. It increases when net profit – the numerator – rises, assuming the level of equity – the denominator – remains constant.

Companies with higher ROEs are generally rewarded with higher valuations, says the head of research at Phillip Securities Research, Paul Chew. Lower interest rates “can place less pressure to keep up the ROEs since (returns from) alternative investments such as fixed deposits or bonds will be lower”, he says.