Return on Equity (ROE): The Most Industry-Specific “Generalist” Metric

[@financialmodeling]

Files & Resources: breakingintowallstreet.com/kb/financial-statement-analysis/return-on-equity-roe/ Table of Contents: 0:00 Introduction 4:36 Part 1: Why ROE for Banks and Insurance? 5:35 Part 2: ROE for Banks (JPM, Citi, Wells, and BofA) 7:42 Part 3: ROE for Utilities (MGE Energy) 11:40 Recap and Summary

[@russellfernandez57]

Something to add, it's easy to get an R^2 of 0.99 when you have only 3 data points. If you added in more companies, things could change.

[@financialmodeling]

That is true, but even if you expand the set of banks here (not done in the interest of time), R^2 is still quite high (over 0.9). It's higher correlation than pretty much any other operational metric / valuation multiple pairing in any industry.

[@smholding7]

Hi, What are your thoughts on capitalizing for instanse R&D which affects ebit and profit as a whole like professor Aswath suggests? That would also affect in computing ROE and ROIC. I would love to hear your thoughts on that since I'm trying to learn as much as possible. Thank you!

[@financialmodeling]

We tend not to do this because it over-complicates the analysis and doesn't change anything as long as you calculate R&D consistently for all companies in the set. Also, R&D in general is not a major expense for banks, insurance firms, and utility companies, which are the only 3 industries where ROE is important. If you do this, ROE will tend to increase because the R&D amortization in the numerator will be less than the normal annual expense (cash outflow), and the denominator will increase due to higher Equity to balance the R&D Asset on the other side - but usually it's a smaller increase, percentage-wise, than the numerator (but large variance by company/industry).

[@smholding7]

@@financialmodeling Alright. Thanks very much!

[@parkashmagar8468]

For which job roles is this course mostly focused on

[@financialmodeling]

Please see: mergersandinquisitions.com/breaking-into-wall-street-biws/

[@SilentCareer]

have you done the same for ROIC?

[@financialmodeling]

Yes, please see the previous videos in the channel.