Paul,
If I may butt in, if one relies on ROE alone, that might be flawed. For example, a company that utilizes a high degree of leverage to generate assets may show an abnormally high ROE since by definition:
ROE = Net Income / Common Shareholder Equity
While ROE should be evaluated, one must also evaluate ROA, Price to Book Value (preferably tangible) and ROIC in order to obtain the best comparisons of companies. Additionally, since many companies have various forms of off balance sheet financing, such as leases and commitments, one needs to adjust the balance sheet accordingly.
Lastly, when evaluating ROE, one must also take into consideration each company's Interest Coverage (EBIT/Interest Expense) and Debt to Equity ratio.
Lastly, one should not compare ratios of companies in different industries to determine whether or not one company is a buy in view of another. Instead, for example, if one wanted to determine whether NKE is a value play, one should look and compare the fundamentals of Reebok and Stride Rite. |
