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• Return on Equity
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Comcast Financial performance
The book value of the company nearly
doubled from $8.19 a share in 1999 to $15 a
share in 2009. Revenues grew sixfold from
1999's $6 billion to almost $36 billion in 2009.
Net profit margin rose from 4.2% in 1999 to
8.4% in 2009, with operating margins
improving 31 percent and return on equity
doubling to 6.7 percent in the same time
span. Between 1999 and 2009, return on
capital nearly tripled to 7 percent.
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Just in time (business) Effects
Also, the factory began building many
vehicles to order, eliminating the risk they
would not be sold. This improved the
company's return on equity.
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ExxonMobil - Ratios overview
1
Exxon had better return on assets (6.75
percent) and return on equity (14.57
percent) ratios (Mobil’s were 3.95 percent
and 9.01 percent correspondingly)
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Rate of return
ROI is an abbrevation of return on
investment, i.e. return per dollar invested.
It is a measure of investment performance,
as opposed to size (c.f. return on equity,
return on assets, return on capital
employed).
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Rate of return - Uses
1
Ratios typically used by financial analysts
to compare a company’s performance
over time or compare performance
between companies include return on
investment (ROI), return on equity, and
return on assets.
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Capital gains tax - Norway
1
According to the papers explaining the
new policy, a dividend tax without such
shielding could push up the pressures on
the rate of return on equity investments
and lead Norwegian investors from
equities to bonds, property etc.
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Decoupling - Utility regulation
As a result, many consumer advocates
have requested and state and federal
regulators have required that utility
companies profit levels (measured through
a return on equity allowance) be reduced
to reflect lower risk.
1
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Just-in-time (business) - Effects
Also, the factory began building many
vehicles build to order|to order, eliminating
the risk they would not be sold. This
improved the company's return on equity.
1
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Enterprise relationship management - Overview
* The 25 companies most active in
alliances achieved a 17.2 percent return
on equity - 40 percent more than the
average return on equity of the Fortune
500. - Harbison et al. (2000)
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Enterprise relationship management - Overview
* The 25 companies least active in
alliances lagged the Fortune 500, with an
average return on equity of only 10.1
percent. - Harbison et al. (2000)
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Corporate finance - Working capital
1
* In this context, the most useful measure
of profitability is Return on capital (ROC).
The result is shown as a percentage,
determined by dividing relevant income for
the 12 months by capital employed;
Return on equity (ROE) shows this result
for the firm's shareholders. As above, firm
value is enhanced when, and if, the return
on capital exceeds the cost of capital.
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BC Hydro
1
Electricity is delivered through a network
of 18,286 kilometers of transmission lines
and 55,254 kilometers of distribution lines.
For the 2008-2009 fiscal year, the
domestic electric sales volume was 50,799
gigawatt hours and net income was $366
million, resulting in a return on equity of
11.75 per cent. As of March 31, 2009, BC
Hydro and its subsidiaries employed 5844
full-time and part-time employees.
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ABN AMRO - Reaching a cross roads
1
ABN AMRO had come to a crossroads in
early 2005. The bank had still not come
close to its own target of having a return
on equity that would put it among the topfive of its peer group, a target that the
CEO, Rijkman Groenink had set upon his
appointment in 2000. From 2000 until
2005, ABN AMRO's stock price stagnated.
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Deutsche Bank - Post-WWII
1
These formed part of an overall growth
strategy that also targeted a sustainable
25% return on equity, something the bank
achieved in 2005.
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Leverage (finance) - Worked example
1
Equals return on equity =
8% + 5% = '13%'
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Concur - Current status
1
* The company was named to the Seattle
Times NW 100 ranked at #12 and was
previously ranked at #4. To rise to the top
of The Seattle Times' rankings, companies
must excel over a two-year span on four
performance measurements: return on
equity, stock-price appreciation, sales per
employee and operating income.
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Working capital - Decision criteria
The result is shown as a percentage,
determined by dividing relevant income for
the 12 months by capital employed; return
on equity (ROE) shows this result for the
firm's shareholders
1
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Modigliani-Miller theorem - Proposition II
* r_E is the required
rate of return on equity,
or cost of equity.
1
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Modigliani-Miller theorem - Proposition II
A higher debt-to-equity ratio leads to a
higher required return on equity, because
of the higher risk involved for equityholders in a company with debt. The
formula is derived from the theory of
weighted average cost of capital (WACC).
1
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Stock - Share price determination
1
First, because financial risk (financial)|risk
is presumed to require at least a small
premium on expected value, the return on
equity can be expected to be slightly
greater than that available from non-equity
investments: if not, the same rational
calculations would lead equity investors to
shift to these safer non-equity investments
that could be expected to give the same or
better return at lower risk
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Lehman Brothers - An evolving partnership (1969–1984)
Under Peterson's leadership as Chairman
and CEO, the firm acquired Abraham Co. in
1975, and two years later merged with the
venerable, but struggling, Kuhn, Loeb Co., to
form Lehman Brothers, Kuhn, Loeb Inc., the
country's fourth-largest investment bank,
behind Salomon Brothers, Goldman Sachs
and First Boston. Peterson led the firm from
significant operating losses to five
consecutive years of record profits with a
return on equity among the highest in the
investment-banking industry.
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Financial statement analysis
3.2) Analysis of profitability refers to the
analysis of return on capital, for example
return on equity, ROE, defined as earnings
divided by average equity. Return on equity,
ROE, could be decomposed: ROE = RNOA +
(RNOA - NFIR) * NFD/E, where RNOA is
return on net operating assets, NFIR is the
net financial interest rate, NFD is net financial
debt and E is equity. In this way, the sources
of ROE could be clarified.
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Financial statement analysis
Unlike other ratios, return on capital has a
theoretical benchmark, the cost of capital also called the required return on capital. For
example, the return on equity, ROE, could be
compared with the required return on equity,
kE, as estimated, for example, by the capital
asset pricing model. If ROE WACC, where
WACC is the weighted average cost of
capital), then the firm is economically
profitable at any given time over the period of
ratio analysis. The firm creates values for its
owners.
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Stock dilution - Value dilution
Value dilution describes the reduction in
the current price of a stock due to the
increase in the number of shares. This
generally occurs when shares are issued
in exchange for the purchase of a
business, and incremental income from
the new business must be at least the
return on equity (ROE) of the old business.
When the purchase price includes
goodwill, this becomes a higher hurdle to
clear.
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Tax shield - Case B
The reason that he was able to earn
additional income is because the cost of
debt (i.e. 8%) is less than the return
earned on the investment (i.e. 10%). The
2% difference makes income of $80 and
another $100 is made by the return on
equity capital. Total income becomes $180
which becomes taxable at 20%.
1
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Adjusted present value - APV formula
1
The discount rate used in the first part is the return
on assets or return on equity if unlevered.
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Performance paradox - Multiple measures and growth of the performance measurement
industry
And the 1960s and 1970s saw the
emergence of purely financial measures of
performance relating information on
dividends and return on equity
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Performance paradox - Change in dominant measures
A compilation of surveys examining the
stated financial goals of companies over
the century found the following: companies
strove to maximize market share in the
late 1960s; earnings per share in the mid1970s; return on equity in the early 1980s;
and cash flow and share prices in present
day
1
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Growth stock - Criteria
1
Analysts compute Return on equity (ROE)
by dividing a company's net income into
average Ownership equity|common equity.
To be classified as a growth stock,
analysts generally expect companies to
achieve a 15 percent or higher return on
equity. CAN SLIM is a method which
identifies growth stocks and was created
by William O'Neil a stock broker and
publisher of Investors Business Daily.
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DuPont analysis
'DuPont analysis' (also known as the
'dupont identity', 'DuPont equation',
'DuPont Model' or the 'DuPont method') is
an expression which breaks ROE (Return
On Equity) into three parts.
1
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DuPont analysis - ROE analysis
1
The Du Pont identity breaks down Return
on Equity (that is, the returns that
investors receive from the firm) into three
distinct elements. This analysis enables
the analyst to understand the source of
superior (or inferior) return by comparison
with companies in similar industries (or
between industries).
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T-model
1
ROE = the company's return on equity, i.e. earnings
during the period / book value;
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T-model - The cash-flow T-model
1
In 2003 Estep published a version of the
T-model that does not rely on estimates of
return on equity, but rather is driven by
cash items: cash flow from the income
statement, and asset and liability accounts
from the balance sheet. The cash-flow Tmodel is:
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Return on equity
1
'Return on equity' ('ROE') measures the
rate of return on the ownership interest
(shareholders' equity) of the common
stock owners. It measures a firm's
efficiency at generating profits from every
unit of shareholders' equity (also known as
net assets or assets minus liabilities). ROE
shows how well a company uses
investment funds to generate earnings
growth. ROEs between 15% and 20% are
generally considered good.
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Return on equity - The formula
1
:\mathrm = \frac \mbox Net Income \mbox
Shareholder Equity
http://www.answers.com/topic/return-onequity Answers.com Return on Equity
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Return on equity - The DuPont formula
Thus, a higher proportion of debt in the
firm's capital structure leads to higher
ROE.[http://www.investopedia.com/univers
ity/ratios/profitability-indicator/ratio4.asp
Profitability Indicator Ratios: Return On
Equity], Richard Loth Investopedia
Financial leverage benefits diminish as the
risk of defaulting on interest payments
increases
1
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Decoupling (utility regulation)
As a result, many consumer advocates
have requested and state and federal
regulators have required that utility
companies profit levels (measured through
a return on equity allowance) be reduced
to reflect lower risk.
1
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Return (finance)
'ROI' is an abbreviation of return on
investment, i.e. return per dollar invested.
It is a measure of investment performance,
as opposed to size (c.f. return on equity,
return on assets, return on capital
employed).
1
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National Stock Exchange of Australia - Management Efficency
1
As of 2013 the National Stock Exchange
of Australia had return on total asset
(ROA) of -38.76%, this means that it has
lost $38.76 on every $100 spent on
assets. Similarly, the National Stock
Exchange of Australia shows return on
equity (ROE) of -99.65% meaning that it
generated substantial loss on money
invested by shareholders.
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Finance lease - Impact on accounting
1
* Under operating lease conditions, lease
obligations are not recognized; therefore,
leverage ratios are understated and ratios
of return (return on equity|ROE and return
on assets|ROA) are overstated.
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Earnings growth - Overview
1
Note that for SP500, the return on equity
has ranged between 10 to 15% during the
20th century, the plowback ratio has
ranged from 10 to 67% (see payout ratio).
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Strategic planning software
1
In the 1970s, the Strategic Planning Institute
collected data on the performance of
business units at its
subscribers.http://www.inc.com/encyclopedia/
profit-impact-of-market-strategies-pims.html
The resulting Profit Impact of Market
Strategyhttp://pimsonline.com/ (PIMS) model
was very influential with its key insights about
the value of having highest or second highest
market share in improving profitability and
return on equity
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CROCI
The ratio is similar to Return on
equity|ROE ratio, but CROCI is calculated
on a cash basis and on an Enterprise
value|EV-basis, taking into account all the
company's security-holders.
1
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GT Interactive Software - 1997 – $530 million in revenues but $25 million net loss
For 1997 GTIS's return on equity was a
dismal 16.14%.[http://www.johnson.cornell.edu/park
ercenter/docs/studentresearch/1998_spring/e
rts.pdf ElecArts.PDF] For the year, GTIS's
revenue growth continued to decelerate,
increased only 45% to $530
million.[http://www.atnewyork.com/news/articl
e.php/249211 Gt Interactive Hires Disney
Honcho, Raises Cash] During 1997 GT
Interactive posted its first net loss, totalling
$25 million.
1
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KeyBank
By 1993, the rural strategy with local
management and minimal technology made
Key a very profitable bank. However, it was
getting tougher for Riley and CFO William
Dougherty to maintain their 15 percent return
on equity target and investors were cooling
on Key stock after many high growth years.
Accordingly, Key began testing a Vision 2001
computer system, which would speed up and
enhance the loan process through faster
credit scoring, loan servicing and collection
capabilities.
1
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ROCE
* Return on equity|Return on Common
Equity, used in finance as a measure for
return on invested capital (not the same as
Ret. on Cap. Empl.)
1
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Handelsbanken - 1970-1990
In 1973, a particular form of profit sharing
scheme was introduced. When
Handelsbanken meets its goals of higher
return on equity than the average of the other
listed Swedish banks, a profit share is paid to
a foundation named Oktogonen, which keeps
its fund entirely in Handelsbanken shares.
Payment only takes place after retirement,
which means that all employees are
interested in securing the long-term
profitability of the bank. Oktogonen owns
around 10 per cent of Handelsbanken's
shares.
1
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Sustainable growth rate - Relationship between revenue growth, total shareholder value
creation and profitability
1
Return on Assets (ROA), Return on Sales
(ROS) and Return on Equity (ROE) do rise
with increasing revenue growth up to 10 to
25% and then fall with further increasing
revenue growth rates.
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Business-agile enterprise - Overview
Business-agile enterprise improves
financial measurements such as margins,
profitability, time to market, revenue
growth, earnings per share, ebitda
(earnings before interest, taxes,
depreciation amortization, return on
equity), return on assets, and return on
investments.
1
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Bank Mandiri
1
It also has Capital Adequacy Ratio (CAR)
of 16,08% (including market risk), Return
on Asset (RoA) of 3.45%, and Return on
Equity (RoE) of 22.18%
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Marubeni - History
1
In 2013, the Tokyo Stock Exchange
recognized Marubeni as the best
Japanese company at increasing
enterprise value, citing management's
efforts to maximize return on equity.
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State Bank of Travancore
1
Return on Equity is at 15.54.%, and
the Return on Assets stood at
0.66.%
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British Caledonian in the 1980s - A new airline for Europe
The latter represented a return on
equity|return on total equity employed plus
previously retained earnings of 18.2%.
This was substantially better than BCal's
short-haul operation could have hoped to
achieve on its own.It was nice to fly with
friends! The story of Air Europe., Simons,
G.A., GMS Enterprises, Peterborough,
1999, p. 87
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John Neff
1
One area in which Neff is similar to value
investors such as Warren Buffett is in
emphasizing ROE (return on equity),
stating that it is the single best measure of
management effectiveness
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Union Bank of Switzerland - Merger with Swiss Bank Corporation
1
During the mid-1990s, UBS came under
fire from dissident shareholders, critical of
bank's relatively conservative
management and lower return on
equity.[http://www.nytimes.com/1995/01/09
/business/swiss-battle-for-big-bankproves-costly.html Swiss Battle For Big
Bank Proves Costly]
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