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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (15196)	8/15/2002 7:16:41 AM
From: Dave	Read Replies (3) \| Respond to of 78596

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.

To: Paul Senior who wrote (15196)	8/15/2002 7:17:33 AM
From: Dave	Respond to of 78596

deleted double post (eom)

To: Paul Senior who wrote (15196)	8/15/2002 1:07:05 PM
From: Jurgis Bekepuris	Respond to of 78596

Paul, >Do you have a way to relate ROE to price to book value for these three companies? I don't use p/book so I don't have a way to relate ROE to p/book. I use Mike Burry's Buffetology spreadsheet which uses ROE to estimate future earnings, market cap and subsequently expected return. >DOV. Current price 28 in a range roughly between 26 and 43. >I'll superficially guess ROE is about 20-23%. >Sells about 2.45x its approx. $11 book value. It's a buy with expected ~17% annualized return if the ROE remains at 20% for the next X years. However, note that 2001 ROE dropped to 9.9% and equity has been dropping for last couple of quarters. I did not investigate more closely yet. If you assume 15% ROE going forward, it is not a buy. I may investigate it further. >HRB. Current price about 48 in a range roughly between >32-51. Maybe 20-25% ROE. Selling at 6x book value of $7.56. It's not a buy with expected ~9% annualized return if the ROE remains at 21% for the next X years. >NKE. Current price about 44 in a range about 41-64. > Past few years' ROE roughly 12-18%. Selling at 3x book > value of 14. It's not quite a buy with expected ~12% annualized return even if the ROE is expected to be 18% for the next X years. So it looks we mostly agree with our opinions on these three stocks. Jurgis