Question regarding ROE

Q & ACategory: QuestionsQuestion regarding ROE
Chin Kian Wee asked 4 years ago

According to Bursa method, to pick a good company to invest in, the minimum requirement to look at must be at least ROE >15% and an increasing net income year over year.
The link below is Tesla financial report, surprisingly its ROE and net income do not meet the requirement of a good company, however this company share price keeps moving higher and higher.
This scenario has been puzzling me for quite some time, same goes to some other stocks where its share price keeps increasing while its ROE and net income fall below requirement.
In your opinion, may I know why this scenario is happening? If it is not for the ROE and net income of a company, what are the other key elements that drive the share price? 
Thank you

1 Answers
KCLau Staff answered 4 years ago

That’s the funny thing about stock investing. There are many similar companies like Tesla. 
One thing we need to understand is that when there is a Tesla, which will grow and ultimately become profitable and giving multiple folds of return to investors, there are also hundreds of companies trying to be like Tesla. But those companies failed and burnt investors’ money.
Some investors are right about Tesla. I am also a Tesla shareholders. The return I made from it is more due to luck rather than investing skills. And I didn’t buy Tesla shares with a substantial portion of my capital. It is because as a value investor, I value capital protection. I only bet big when the odds is substantially on my side. 
Back to your question, why some company don’t have high ROE but still grow like crazy? Several ways to look at the reasons:

  • There are investors who believe in the company’s story, i.e. believe Tesla will be the largest car manufacturer, battery tech in the future 
  • Some companies plan to grow at all costs, until they dominate the market, only then they reduce acquisition cost and turn a profit. This trend is the game plan of most tech and SAAS companies.
  • There are speculators who think the stocks got potential and willing to pay a very high price for future growth

When you want to be a safe and conservative value investor, you might miss these types of stocks.. like Amazon, Tesla, and a lot of other multi-baggers that is always at high valuation. But you also avoid investing into duds.
Good news – the market is huge. You will not run out of options.