Volume 12, No. 14

 

Return On Equity Remixed:  The S&P 500's Real Numbers  Return on equity is an old standby of a performance yardstick for equity investors, and with good reason - it's simple, consistent and tells a story about performance in straightforward fashion. Investors almost take it for granted because of its simplicity. In short, the figure gives a quick summary description of what management has done for shareholders lately. While it has its shortcomings and its detractors, it's a measure that's not likely to disappear from common use anytime soon. One shortcoming: elective accounting standards (stock option accounting, for instance) and arguable accounting standards (pension accounting, for instance) can significantly affect the figure. Another shortcoming: changes in accounting principles, over time, will also introduce biases into the figures. If you aren't careful to filter out those effects, you just might get the wrong signal from the return on equity figure. This report shows how some of these variables have affected return on equity in the S&P 500 over the last five years - and highlights the differences stemming from accounting as opposed to performance.

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