wizofoz

Good stuff. I remember always looking at ROE on CFA L1 problems to get at the growth rate for reinvested stuff.

I also remember that the Dupont model was pretty useful for figuring out whether ROE was coming from turnover or from profit margins or from financial leverage.


Palantir's point about persistence of earnings is good too. I hadn't thought of that. Valuations can fluctuate a lot without necessarily being related to company operations, so that would affect earnings yields but not ROE.


I suppose a big thing is that book value might be (for some types of companies) a more solid basis for projecting future earnings than market value of equity (though I'd still be inclined to use ROA for that). I guess that's a kind of corollary to both 99 c sloop and Palantir's comments, but I never quite got that when I was studying for CFA.


Anything else? I know some of you guys pay attention to ROE fairly regularly.

(I'm thinking about this as I try to work through good stock screens for the current environment, and know that people often use ROE as a criterion)

wizofoz

I think it's especially useful in screening if you look at RoA side by side with RoE. If a firm has historically generated RoA and RoE of say between 10-15 very consistently, I think you can make confident projections of earnings down the line.


Another thing to keep in mind while screening is to also be looking at how much cash they have per share as well as debt. Cash brings down the displayed RoA/E, but it could really be masking a much higher one. I like to look for firms that have a lot of cash+equivalents on hand, but with a relatively meager RoA.