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Andrew T. Gillies is Director of Communications at the Center for Audit Quality, an affiliate of the American Institute of CPAs, in Washington, DC. Based in Washington since 2002, he has also worked in editorial and communications roles at the Investment Company Institute, the World Bank, Forbes, and Vault.com. His policy-themed writing has focused on aerospace and defense, energy and environment, transportation, and financial services.

Wednesday, October 05, 2005

Using Return On Equity For Stock Bets

WASHINGTON, D.C. - What kind of bang does management deliver for the buck? One way for stock buyers to answer that question is to look at return on equity, or net income divided by shareholder's equity. The number, expressed as a percentage, can indicate how well management delivers profit given the capital entrusted to them.

Return on equity has its flaws, namely that it sometimes gets a misleading boost from accounting matters rather than management prowess. For example, one-time events, such as the sale of assets, can puff up the net income in ROE's numerator. Likewise, negative earnings, changes in accounting principles, share buybacks or restructuring charges may distort a company's net worth.

Full story at Forbes.com