in CFA level 2 corporate finance and equity sections we learnt regarding the return on equity and return on assets ratios.
clearly the higher they are the more likely the business is high quality but what I wanted to ask whether anyone knows these two questions:
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how can we separate the return on assets that the company already has from past periods and our return on new capital that the company retains from earnings and chooses to reinvest?
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how can we determine whether the return on the earnings that are reinvested is attractive? it could be that the ROA and ROE measures show a high return because the “old” assets produce a great return but the new capital is being wasted.
presumably even if the price of the stock is high but we can somehow determine that the new capital is reinvested with a very high return then over a long holding period this will allow the investor to still get a great return but if its the other way around and the return on new reinvested earnings is low then this is a bad investment.