 # ROE

This is a simple one but why is ROE based on trailing earnings rather than leading? Wouldn’t it make more sense for ROE(1) = NI(1)/BV(0) [and the same logic for the various components of the Dupont ratio)?

Well it wouldn’t be ROE than, it would be E(ROE).

It would be nice, but we don’t know what NI(1) is and would have to forecast it. We know with certainty what NI(0), S(0), Assets(0) and Equity(0) are.

you’re calculating return based on your beginning book value. You ending book value has already incorporated the earnings of that year - so you can’t measure based on that… you have X amount today. You earn Y over the year. If you wanted to calculate what your return was - wouldn’t you do Y/X ?? (as opposed to Y/(X+Y)

That’s what I’m saying mumukada, sounds like you’re agreeing with me. I did a questions where it gave financial statemenst for 1999 and 2000 and asked me for ROE in 2000. So I took NI in 2000 and divided it by (closing) BV from 1999.

Sponge/Mcleod I understand what you’re saying, but what if you’re asked to calculate the historic ROE where the full data is available for both years? It’s page 343 of CFA vol 4 if someone wants to take a look…

You can caculate ROE using a number of combinations of what Equity is. You can take current Equity, Avg Equity, or Beg Equity. If you are not given any other info, I would suggest using current. If you did both Beg and current you could calculate the change.

The equation “P/B = (ROE - g) / (r - g)” contains implicitely that “NI(1) = ROE(1) * BV(0)”…

So what’s the consensus?