Analyzing the 2019 annual statements from a company I found that they have calculated their own ROE as well their average last 5 years ROE, which I find very useful. However, having a closer look to their figures I found that something didn’t quite match.
This is what they have in their statement:
Year: Return on Equity (ROE)
Annual average 2015-19 (%): 9.8%
If you calculate the Geometric mean of these 5 values, you end up with an average rate of 7.8%. Quite different to the 9.8% that they say.
I wrote them to understand how they calculate this figure, and it looks like the use the CAGR between 2019 and 2015 and 4 periods to do it. So (9.2/6.3)^(1/4) = 9.9%
Which confused me a lot. After some researches I saw that the CAGR is usually used to compute the compound annual growth rate when you have a set of values, not percentages.
Shouldn’t the company use a geometric mean considering the 5 periods instead of CAGR with 4 periods? Or at least use the CAGR considering the 5 periods? Am I understanding it wrong?
Thanks for your hints!