Obviously return on equity is relevant but I’m just trying to get a gauge on exactly how relevant it is. How would it factor in the following example (when comparing the strength of the following two companies):
Say there were two companies that were totally identical in every way – the only difference being the amount of equity of each company.
Company A had equity of 1 million dollars and an income of $100,000 for the year and company B had equity of $100,000 and an income of $100,000 for the year.
Obviously, for the year, company A had an ROC of only 10% whereas company B had an ROC of 100%. Which would you consider the superior company? Company A’s equity is now 5.5 times greater than that of company B’s (1.1M vs .2M) but would company B’s greater ROC for the year be indicative of their ability to generate greater future income (as opposed to being nothing more than a misleading variable created by the company’s unusually low equity)? Basically, if you just saw these two numbers (the equity and income amounts of the 2 companies for the past year), and nothing more (work with me here), could it be presumed in any way that company B would generate greater income than company A in the following year?
Submitted March 12, 2018 at 04:17AM by traderlmd http://ift.tt/2FBqmlL
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