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I just learned of an Easter Egg in Section 2, of Tool Kit 5. By typing "Alt R" you can change the % Earned on Equity Ratio from (EPS / Book Value) to (EPS / Book Value of the Previous Year). What is the advantage of using this new ratio?
John Tufts
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Rank: Advanced Member
Posts: 82
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John:
At 09:38 PM 12/4/2007, you wrote:
> From the The Toolshed forum at StockCentral.com, John Tufts writes:
> I just learned of an Easter Egg in Section 2, of Tool Kit 5. By
> typing "Alt R" you can change the % Earned on Equity Ratio from
> (EPS / >Book Value) to (EPS / Book Value of the Previous Year).
> What is the >advantage of using this new ratio?
There are a bunch of reasons for doing this; and they all boil down to the fact that ROE, when calculated using any equity other than beginning equity can produce skewed and misleading results. For a thorough discussion of this issue, I invite you to read the following: www.financialiteracy.us/et/AAII_ROE_Article.pdf (I've also attached it in case you can't download it from here.)
Simply stated, if you had $10 and made $1 on it, what would your percent return be? If you said 10%, you'd be right. Now look at the SSG and see what you would be doing if you followed what it says in 2B: You would get 9.1% for an answer because the denominator in the calculation would be $11 and not $10.
ET |
Ellis Traub |
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Ellis,
Thanks for the information.
John
style="PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
----- Original Message -----
Sent: Tuesday, December 04, 2007 8:19
PM
Subject: [SPAM] [StockCentral.com] Tool
Kit 5, Section 2 (18bda102-78a6-4477-8e05-8f8cb0ab1633)
A message was posted to a thread you are tracking.
ETraub Posted:12/05/2007
3:19 AM
Subject:
[StockCentral.com] Tool Kit 5, Section 2
John: At 09:38 PM
12/4/2007, you wrote: > From the The Toolshed forum at
StockCentral.com, John Tufts writes: >I just learned of an Easter Egg
in Section 2, of Tool Kit 5. By >typing "Alt R" you can change the %
Earned on Equity Ratio from (EPS / >Book Value) to (EPS / Book Value
of the Previous Year). What is the >advantage of using this new
ratio? There are a bunch of reasons for doing this; and they all boil
down to the fact that ROE, when calculated using any equity other than
beginning equity can produce skewed and misleading results. For a
thorough discussion of this issue, I invite you to read the following:
www.financialiteracy.us/et/AAII_ROE_Article.pdf (I've also attached it
in case you can't download it from here.) Simply stated, if you had $10
and made $1 on it, what would your percent return be? If you said 10%,
you'd be right. Now look at the SSG and see what you would be doing if
you followed what it says in 2B: You would get 9.1% for an answer
because the denominator in the calculation would be $11 and not $10. ET
href="http://www.stockcentral.com/desktopmodules/ntforums/viewer.aspx?portalid=1&moduleid=450&attachid=298"
target=_blank>Attachment:
AAII_ROE_Article.pdf
To view the complete thread and reply, please visit:
http://www.stockcentral.com/default.aspx?tabid=143&view=topic&forumid=6&postid=4566
Thank
you, StockCentral.com (beta) :: Community, Data, and Insight for Investors
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