According to the textbook: Return on Equity (ROE) is a measure of how the stockholders fared during the year. Because benefiting shareholders is our goal, ROE is, in an accounting sense, the true bottom-line measure of performance. Breaking ROE into its constituent parts, by using the DuPont identity, identifies a firm’s operating efficiency, asset use, and financial leverage. However, these measures rely upon accounting data that may or may not be useful. Why would a firm have a negative ROE? Should investors buy stocks that have negative ROEs? What do you see as an alternative measure of how a firm benefits its shareholders?
According to the textbook: Return on Equity (ROE) is a measure of how the stockholders fared during the year. Because benefiting shareholders is our goal, ROE is, in an accounting sense, the true bottom-line measure of performance. Breaking ROE into its constituent parts, by using the DuPont identity, identifies a firm’s operating efficiency, asset use, and financial leverage. However, these measures rely upon accounting data that may or may not be useful. Why would a firm have a negative ROE? Should investors buy stocks that have negative ROEs? What do you see as an alternative measure of how a firm benefits its shareholders?
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 5P
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