Question
Below the author is sharing how important the ROE financial ratio is to a company. So, if the ROE is negative does that mean the
Below the author is sharing how important the ROE financial ratio is to a company. So, if the ROE is negative does that mean the book value doesn't grow and is the earnings falling?
"An alternative approach is that a well-performing company's intrinsic value could be estimated by using book value per share multiplied by an intrinsic price-to-book ratio (P/B ratio), which is greater than 1.0. In this approach, estimating the intrinsic priceto-book ratio is the essential point. Because linking the equity per share with the earnings per share is ROE, the real source of growth of book value and earnings are from the ROE. When the ROE is positive, the book value grows and earnings are positive. Otherwise, the book value declines and earnings are negative. Thus, the ROE is the most important financial ratio to judge the growth or decline of a stock price. Hence, Lai (2015) emphasized that market-to-book ratio is a function of ROE."
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