the calculation for ROE is used by many fundies - it is called...

the calculation for ROE is used by many fundies - it is called the 'binomial method' from memory...and taught in FINANCE disciplines

It is a very effective method for seeing what parameters affect ROE esp where theres debt involved

its saying you gotta look at margins; you gotta look at revenue per asset (remember assets can be equity and debt; so revenue per 1 dollar of assets tells u how well the company is using its equity and debt; hence higher margins and higher revenue per asset translates to higher returns on assets i.e ROA or ROC); Then its saying that the return on assets is obviously affected by higher ratio of assets to equity (i.e if the ratio of assets to equity is higher, it means youre more leveraged, and thus youll get a higher figure for ROE if youre using debt. How effectively ure using the debt is reflected in this ROE calculation though.

Fundies use this

* Basically says to look out for the net margins; lookout for debt and how it affects ROE figure (it can inflate the ROE); the revenue per assets is the asset turnover ratio taking us further in2 seeing how effective returns are on assets (i.e equity AND debt)

Sorry for repeating myself....i remember this method used by a higher up in wesptac when i worked there as a advisors assistant

Its a very good technique

As is looking at cash-flows and especially FREE CASH FLOWS (i.e cash flow less divvys less CAPEX - - - if this figure is positive, YOU KNOW the company is doing VERY WELL as it can retain cash even after paying a divvy plus all expansionary or working capital CAPEX, and thus can grow from this retained cash instd of having to issue stock or raise debt; Or it can increase future divvys or make a capital return from all the excess cash)

JBH rates VERY HIGHLY on all these ratios and all these fundamental fronts

thats why guys like rog montgomery loves them so much

theyre a cash cow and can grow from retained profits post paying a divvy and post capex (from memory)

ROE; ROA; CASH FLOWS , free cash flows, earnings stability (How many times EPS has met/exceeeded or missed every half yr reporting period) are all exceptional, even if they start to slow down in the future (the figures are all still exceptional)

So What PE do u think it should garner? I reckon forward PE 11 is pretty cheap even if growth is mininal coz u can always get reatained cash flows and thus either higher divvys, or regular returns on capital.

Thus a PE 10-11 is too low; Its a very EFFICIENT business and makes very good returns on equity and capital even if growth slows