Volume 4, No. 8

 

The 20% ROE Club: Admission Courtesy Of GAAP:  Return on equity is a most basic financial measure, and is a tool used for assessing managerial performance as well as providing an input to valuation techniques like the dividend discount model. Companies with returns on equity exceeding 20% have been regarded as exceptional members of an elite "20% Club". Over the past four years, the equity component of ROE has been drastically altered by the restructuring wave and several pivotal accounting pronouncements. Net result: because of the slimmed-down equity denominator in the ROE fraction, there are companies that have joined the 20% Club that didn't have a remote chance of membership a few short years ago. This study of the companies comprising the Dow Jones Industrial Average index reveals the surprising impacts of recent accounting standards and restructuring charges on the measurement of return on equity.

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