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Technology Stocks : Silicon Graphics, Inc. (SGI)

SGI 84.64

0.0%

Nov 20 3:59 PM EST

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To: Jeff Maresh who wrote (1627)	6/18/1997 4:00:00 PM
From: brushwud	of 14451

> I think you've got ROE (Return on Equity) mixed up with ROI > (Return on Investment). No, not really. If you put $40,000 down on a $200,000 house and sell it a year later for $240,000, what's your ROE? What's your ROI? I'd say 100% to both. ROA would be a different story. ROE is the true measure of business acumen. > The ROE number of 13.5% for SGI is pretty good for a high tech > company in SGI's position. It's a measure of how well management > has used their equity to build the business. SGI's is low right > now mostly because of the Cray acquisition and reengineering... I guess you mean their position is lousy. You listed a handful of larger computer companies doing better. SGI should be more nimble. My original point is this: if a company gets an X% ROE, then it can grow the business without changing the business model by swelling every line on the balance sheet (from cash to receivables to inventory to payables to debt and equity) by X%. Then if they get X% ROE the following year, they will show X% profit growth. If they get X% ROE and they want to grow by MORE than X%, they have to sell more shares (and dilute the ownership) or borrow more money (and increase the risk). So in the long run, you can't really expect the shares to increase in value any faster than ROE, except maybe if interest rates decrease, which would be favorable for all stocks. It's ironic even to talk about SGI & "growth" in the same breath. They reported $.40 per share in April '95. If they ever get back to $.40 per share per quarter, then we can say they had ZERO growth for over two years. Oh boy. What visionary management.

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