hope this makes some sense. The easiest way to “get” the material is to apply it into a real world context. i personally think the CFAI books do a good job at this, but things like Stalla do not (that is expected, those prep cos want to minimize what you read, so adopt a “bullet” format…") ----------------------------------------------------------------------------------------------------------- it is all decomposing the levers that go into ROE. net net, you want to look at a companys ROE and see: 1 - are they increasing ROE from selling more at a higher profit (margin boost) 2- adding on debt 3- selling more at faster turns (efficiency in other words) put in context, Walmart vs Blue Nile. clearly, WMT sells low margin shi*, but they sell it all day and are very efficient. that drives ROA, which drives ROE blue nile, doesnt sell often, but when it does, it is boom! to the bottm line, since they sell higher priced things (plus, I would expect Blue nile to have good margin in general b/c they are selling off a web infrastructure and probably have good invetory turns/management. Web infrastructure which has high fixed costs at fist [hence, AMZN did not generate FCF until 2000, i think], but after that is built, more profits should flow to the bottom line [this is called operational leverage – and yes, it is on the exam – go to corp finance book, i think]. In Blue niles case, higher profit margins (margin = profit/sales) is what is driving ROE… hope that helps at the margin – if you can “get this” concept down, looking at a company’s financial stmts can tell you a lot about a company and do so in less than 3 minutes. ROE and ROIC are in my opinion some of the most important things any analyst should look at it closely.
hey daj, you just read the CFAI material right? cause i did too and i think its pretty good. the difference between you and me is that you passed and i failed. i hope you really do stick around the lvl1 forums for the sake of helping me and only me!
i will help everyone, not just you. and yes, i read CFAI books then I did flash cards the last day or two. good luck and i hope i can assist in nay way. naturally, if i am studying for level II, i will be on AF a lot and will spend my time on both boards. there is actually a good amt of overlap b/t 1 and II.