Comments on: Stocks with the Best Return on Equity (ROE) http://www.equityclock.com/2010/03/08/stocks-with-the-best-return-on-equity-roe/ Is your time up? Wed, 03 Aug 2011 06:15:32 +0000 hourly 1 By: Sheldon Liberman http://www.equityclock.com/2010/03/08/stocks-with-the-best-return-on-equity-roe/comment-page-1/#comment-271 Sheldon Liberman Thu, 18 Mar 2010 14:55:58 +0000 http://www.equityclock.com/?p=1082#comment-271 ROE is useful, but can be misleading. Say, for instance, a company has an ROE of 30% and has an opportunity to make additional investments with an average expected return of 20%, and which has a cost of capital of 10%. It would then make sense for the company to invest in these investments, since, even though its ROE will decline, its profits will rise. A good example would be banks: low ROEs, high profits. ROEs are useful for peer comparison, and rising ROEs are certainly positive, but declining ROEs are not necessarily signs of trouble. ROE is useful, but can be misleading. Say, for instance, a company has an ROE of 30% and has an opportunity to make additional investments with an average expected return of 20%, and which has a cost of capital of 10%. It would then make sense for the company to invest in these investments, since, even though its ROE will decline, its profits will rise. A good example would be banks: low ROEs, high profits.

ROEs are useful for peer comparison, and rising ROEs are certainly positive, but declining ROEs are not necessarily signs of trouble.

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