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6.2 Lecture_12_Thursday_20_August

6 2008 89 2009 36 ind 35 23 22 20 216 20

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Unformatted text preview: t Equity ( TATO ) = ROE Margin Mulitplier NPAT Sales TA × × = ROE Sales TA E 2007 2.6% × 2008 − 8.9% × 2009 3.6% × Ind 3.5% × 2.3 × 2.2 2.0 × 21.6 2.0 × 2.3 2.6 × 2.0 = 13.3% = −391.4% = 16.3% = 18.2% Profit Margin is now good; but there is still an inferior TATO and the Equity Multiplier indicates there is still too much use of Debt in the capital structure 13 13 Caveats concerning ROE • • ROE and shareholder wealth are often highly correlated But it is dangerous to use ROE as a sole measure of a firm’s Why? 1. ROE does not take risk into account • Apart from bringing in a measure of leverage via the equity multiplier Higher leverage can increase ROE This comes with performance for its shareholders _______________________________________ 14 14 1. 2. The ROE of a project tells us nothing about the size of the project relative to the size of other projects with similar ROEs. If ROE determines management bonuses, i...
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