Overview

According to the textbook: Return on Equity (ROE) is a measure of how the stockholders fared during the year. Because benefiting shareholders is our goal, ROE is, in an accounting sense, the true bottom-line measure of performance. Breaking ROE into its constituent parts, by using the DuPont identity, identifies a firms operating efficiency, asset use, and financial leverage. However, these measures rely upon accounting data that may or may not be useful.

Action Items

Why would a firm have a negative ROE? Should investors buy stocks that have negative ROEs?

What do you see as an alternative measure of how a firm benefits its shareholders?