Portfolio Watch: 08 September 2020
In this series of Portfolio Watch, I have a look at the performance of my portfolio. I also look into a new investment concept, explain it in my own words and try to implement it in my own portfolio. This week I look at return on equity and return on assets.
Return on Equity
Return on Equity shows the return a company generated as a percentage of the equity. Equity is the same as net assets, which is the company's assets less it's liabilities. In accounting, the first thing you are taught is that assets equals liabilities and owner's equity. You use this formula to determine the equity. But the average equity is used instead of the equity as at a certain date. So the calculation looks at the equity at the start and at the end of the period.
Return on Equity = Net Income / Average Shareholders' Equity
Just like all the other formulas discussed previously, this must be compared with other companies, preferably in the same industry, to determine whether the company is performing below or above average or the industry standard. Or you could compare the company's ROE to previous ROE's.
The reason why we look at the industry or sector is because companies operate differently in different sectors. In utilities, the income compared to it's equity is relatively low whereas a new tech company should have higher returns than a utilities company.
A good rule of thumb is to aim for a Return on Equity of about 10 to 14%. This is the average return for the S&P500 over a long-term.
Return on Assets
This formula is almost exactly the same as ROE, only thing is equity is replaced by assets. ROE takes liabilities into consideration, where ROA only looks at the company's assets.
Return on Assets = Net Income / Total Assets
ROA works best with banks or financial companies. ROA considers both equity and debt and the return to investors should only really consider equity because assets could be funded by both debt and equity. There are variants to the ROA formula, but I won't going into that in this post.
The difference between the ROA and the ROE is that ROA takes the company's debt into account. The more debt a company has, the higher the ROE will be relative to it's ROA.
ROE and ROA in the Banking Sector
I took a look at the Return on Equity and the Return on Asset stats for the main banks listed on the JSE and this is the result:
I'm not sure what to make of this. Absa Group Ltd, the best performing bank after I looked at the EPS, P/E ratio, Dividend Yield and Dividend Payout ratio, has the worst ROE and the 3rd worst ROA. Even FirstRand, the share I sold, is doing better than Absa on both fronts. Just looking at these two stats, RMB Holdings does not look bad. But I heard that RMB split up with First National Bank, so their price dropped drastically and they might not get back to their previous levels.
Absa is the only bank that has a higher ROA than ROE. This makes me wonder, that Absa probably has far less debt than most of the other banks.
This will require more investigation. I think I have two more weeks before I finally have to decide on a bank and buy the shares.
Last week my portfolio showed a growth of 5.15% and this week it all went tits up. For the first time ever since I started investing, I have negative growth. I am stressing my balls off. I even thought of quitting this whole investment thing, but I won't, just yet. I'm in it for the long haul.
Here are the stocks that lost me the most money (value).
Multichoice Group Limited - (R21.24)
I have no idea what happened with Multichoice. I thought investors will wait for the dividend payout and then sell their stock but the investors decided to sell off early.
I'm thinking about buying more Multichoice stock to lower my average purchase price, and when the price returns to a level where I can make about 5-7 % return, I will sell it off.
Today is the last day I can buy shares and qualify for more dividends. Maybe I should add another R150 to R300 to my portfolio.
Satrix MSCI China Feeder Portfolio - (R10.69)
There isn't much history on this stock because its brand new. So I am not too stressed at this point in time. This is supposed to diversify my portfolio. So if China isn't doing to well, hopefully other parts of the world is doing okay. I won't do much here but I will keep a close eye on it. Maybe buy more to lower the average purchase price.
1nvest S&P500 Info Tech Index Feeder ETF - (R10.66)
This one hurts. This is usually my star in the mist of the darkness but even this stock is seeing it's backside with no mirror. Again, I won't stress too much about it, but I'll monitor it closely. I'm not sure at what level I will sell it at. I'll probably have to figure out what that number is sooner rather than later.
I really hope the markets recover soon. This stuff is depressing to look at. This wasn't an easy post to write.
I'm also thinking about splitting the portfolio watch from the learning section. So I'll just give a quick update on the portfolio but then every month do an in-depth post about the ratios and the research I've done before buying equity.
I think I'll spend a lot of research time in equity because it could offer the highest return if invest in a good firm whereas ETFs is more general and long-term. With ETFs I'll have a general guideline and stick with that.
So until next time, in whatever format I present then. Thanks for reading.