Return on Equity

Return on Equity is a number I like to take a gander at before hitting the “buy” button. It provides some insight as to how well the company is using the investments that people like me (a shareholder) make.

Return on equity is the net income divided by shareholder's equity. Net income is the money that the company made over a period of time and shareholder's equity is the amount of money that shareholders (i.e. me) have invested in the company at that period of time.

A return on equity of greater than 10% is where I like to be investing. When it comes to return on equity bigger is always better. It means that the company is making more money on every dollar that investors have in the company.

To find the return on equity for a given compnay:

1.) Go to: http://money.ca.msn.com/investing/
2.) Enter the ticker symbol of your chosen company in the “Name or Symbol” field (note “.to” is not required because Canada is listed as the market already)
3.) Click on Highlights under the Financial Results header in the left tool bar
4.) Revenue per share is listed fourth from the top in the table displayed

The Impact of the Environment on the Financial Industry

Today the Bank of Canada announced that key lending rates will remain unchanged at 0.25%. This news is good stuff for the financial industry for a couple of reasons:

1.)Low lending rates increase their profit margins.

2.)Loans continue to be affordable for individuals and businesses. (More people getting loans means more business for the banks)

Each of Canada's five big banks announced gains today as a result.

RY +2.05%
TD +1.67%
BNS +2.16%
BMO +4.49%
CM +2.66%

Why did BMO post such a large gain?

Well, they announced quarterly earnings today, and their earnings announcement beat the estimates. The Street (an American news and financial services company) predicted that BMO would earn $1.03 per share in the first quarter. BMO actually earned $1.13 per share.

Exceeding analysts predictions for any company is like Canadians expecting to win an Olympic gold medal on home soil, and then winning 14!

Back to P/E ratios tomorrow. This sidebar is much like the hobby of investing itself. Sometimes events come up that demand immediate attention. The ability to be flexible, identify and address them, even if it slightly changes an initial planned course of action is a great skill.

Revenue Per Share Comparison Between 5 Big Canadian Banks

To find the revenue per share of a company, do the following

1.) Go to: http://money.ca.msn.com/investing/
2.) Enter the ticker symbol of your chosen company in the “Name or Symbol” field (note “.to” is not required because Canada is listed as the market already)
3.) Click on Highlights under the Financial Results header in the left tool bar
4.) Revenue per share is listed fifth from the bottom in the table displayed.
5.) Repeat for each of the five companies selected, and add it to the table of info:

Company
Net Profit Margin (last 12 months)
Earnings Per Share
Revenue Per Share

Royal Bank of Canada (RY)
13.60%
2.56%
20.68

Toronto-Dominion Bank (TD)
16.39%
3.49%
19.88

Bank of Nova Scotia (BNS)
25.32%
3.32%
14.23

Bank of Montreal (BMO)
16.84%
3.29%
19.28

Canadian Imperial Bank of Commerce (CM)
12.04%
2.65%
25.97

A couple of observations:
1.) RY, TD, and BMO have pretty much the same amount of business activity taking place
2.) BNS has significantly less activity taking place, while CM has significantly more
3.) BNS, with the lowest revenue per share, has the highest net proft margin
4.) CM, with the highest revenue per share, has the lowest profit margin
5.) The ranking of the bank in the revenue per share automatically places it in the opposite ranking in the net profit margin category.

What does this mean to my investment decision? Net profit margin trumps revenue per share, so the revenue per share data will be dropped from this particular comparison moving forward.

Earnings Per Share

To find the earnings per share of a company, do the following:

1.) Go to: http://money.ca.msn.com/investing/

2.) Enter the ticker symbol of your chosen company in the “Name or Symbol” field (note “.to” is not required because Canada is listed as the market already)

3.) Click on Highlights under the Financial Results header in the left tool bar

4.) Earnings per share is listed fourth from the bottom in the table displayed.

Repeat for each of the five companies selected, and add the data to the table from Monday's blog:

Royal Bank of Canada (RY)
Net Profit Margin 13.60%
Earnings per Share 2.56

Toronto-Dominion Bank (TD)
Net Profit Margin 16.39%
Earnings per Share 3.49

Bank of Nova Scotia (BNS)
Net Profit Margin 25.32%
Earnings per Share 3.32

Bank of Montreal (BMO)
Net Profit Margin 16.84%
Earnings per Share 3.29

Canadian Imperial Bank of Commerce (CM)
Net Profit Margin 12.04%
Earnings per Share 2.65

So, if I was investing based on earnings per share only, TD would be my number one choice, followed by BNS.

If net profit margin and earnings per share were equally weighted, BNS would be my number one choice (ranking 1st and 2nd for net profit margin and earnings per share respectively), and TD would be my second choice, ranking 3rd and 1st respectively.

But you guessed it! If picking stocks was this easy, it wouldn't be much of a hobby or an activity. Tomorrow in hobby investing – revenue per share......stay tuned!

Earnings Per Share

Once I know a business is profitable, I look at the:

1.)Earnings per share
2.)Revenue per share
3.)Price/earnings ratio
4.)Return on equity
5.)Book value/share
to inform my investment decision.

Earnings per share is the amount of money a business earned over a period of time, divided by the number of shares outstanding.

English: The bigger the better. The more a business is earning, the more successful it is. Earnings per share should also be increasing over time.

For a more detailed definition, go to: http://www.nasdaq.com/reference/dozen/earnings-per-share.stm

To see if the earnings per share is increasing over time, go to the businesses web page. Every publicly traded company should have a link called Investor Information or Investor Relations, or something like it. Click on it. If you can't find it on the home page, do a Google search for "company name investor relations".

Select financial information, statements, income statements, or annual reports (usually a PDF document, and may exist for previous quarter, years, etc.). Find the income statement. Locate the last line item (or close to the last), and it will be earnings per share.

It's important to note that, even though numbers seem like the are pretty concrete measures, they aren't. Businesses have the ability to make assumptions, and make their own formulas that will result in numbers that look great. They know what numbers investors are looking at, and they want them to look good. That's why the more information you can look at, and them more questions you can ask about a company, the better the chance that you'll choose a company that'll make you some cash.

I digress.

Tomorrow we'll find the most recent earnings per share for each of the five big banks we're comparing.