POP Quiz: Is a Rising ROE Good? by CSInvesting

I intend to live forever. So far, so good–Steven Wright

We will tackle Chapter 4 in Deep Value next week and I will find out the status of the forum for advanced students this weekend. I am swamped.

POP QUIZ

If a company is increasing its Return on Equity (“ROE”) over time, is that an attribute of a good business?

Since you are skeptical, you whip out your ROE diagrams:

ROE

Return on Equity

Return on Equity

Even better, you are hired as the investment banker to help advise the CEO how to enhance ROE (bonuses are based on rising ROE and increasing earnings per share).

Today, the company receives 0.00000000000001% on its money market accounts, while the CEO’s company stock trades at 34 times earnings and earns its cost of capital, 10%. Remember, you work for JPMorgan and you have student (MBA) loans to pay off. You sharpen your pencil and……………….?

My thoughts posted this weekend after I pass out grades.