RE: [CANSLIM] Re. ROE

From: "Katherine Malm" <kmalm@earthlink.net>
Subject: RE: [CANSLIM] Re. ROE
Date: Fri, 11 Jul 2003 11:20:51 -0500
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Hi jans,


I agree with you that all in all, while ROE is a useful guide, that it =
should not be an absolute criteria. That stems from the nature of ROE =
calculations, the R&D expenditures you point out being only one example. =
For example, you can have 2 companies of equal profitability and growth =
rates, but if one has higher leverage than the other (more debt), the =
ROE number will look  far different because their equity numbers in the =
denominator will be smaller. Another example, you can have 2 companies =
that are essentially similar, but differing accounting treatments for =
items such as inventory valuations, depreciation methods, pension =
accounting, treatment of in process R&D on acquisition, capitalization =
vs. expensing of leases and other misc. costs, investments in common =
stock, treatment of extraordinary items or discontinued items, etc. will =
all affect the net income (the numerator in the ratio) for one company =
vs. another and thus the resulting ROE.

All that's just to say that ROE is far better as a comparative ratio =
than an absolute ratio requirement. R&D is a good example. Say that in =
general, R&D expenses are high across all companies in the industry, =
then it is far more useful to look at the ROE's of all companies within =
the same industry and see how a particular candidate tracks *in =
comparison.* Or, for any one company, how is their own ROE tracking over =
time? Of course, the real test is whether the company is able to =
effectively translate those R&D dollars into growth in revenues and =
earnings, and, once again, as you pointed out, that is the real acid =
test.

Katherine


- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Spencer48@aol.com
Sent: Thursday, July 10, 2003 5:54 PM
To: canslim@lists.xmission.com
Subject: Re: [CANSLIM] Re. ROE


Katherine:

     I have noticed-and particularly with hi tech stocks-that go-go =
stocks=20
without high ROE's generally make up for that with high R&D's (I get =
both these=20
info data from DGO). =20

     That is, even though a stock (usu. a hi tech stock, but also a =
medical=20
tech stock) has a low ROE the fact that it has a high R&D points up to =
the fact=20
that the earnings (which ROE is made up of) are low for this reason, ie. =
a=20
high R&D.  Also, this applies to the fact that  equity is rising, =
relatively=20
[ie. people and funds wish to invest].  (It would be interesting, by the =
way, to=20
see if fund investing rises in these stocks).

     Although, this is just an impression based on my observations of =
stocks=20
that take off, it would appear to me that stocks in a hi tech industry =
with=20
high earning GROWTH, and with low ROE but a high R&D, are Canslimish if =
not=20
officially CANSLIM. =20

     What do you think?

jans


In a message dated 7/9/2003 11:13:38 PM Eastern Daylight Time,=20
kmalm@earthlink.net writes:

<< A: Generally, we will weigh the pluses and minuses if the stock is =
not a
 perfect fit and "go for it," as you say. ANSI's return on equity is
 currently unreported for 2002, but 2001 came in at 5.4%, which is an
 improvement over 2000's 2.1% return on equity. In this case, given that =
all
 other factors are fairly strong, we would accept the fact that return =
on
 equity is improving, although it does not meet the optimal level we =
would
 prefer. However, if we compared ANSI with, for example, ZMH, another =
stock
 in the same group, we might decide to choose ZMH based on its 115.9% =
return
 on equity, assuming all other factors are equal and ZMH is at a proper =
buy
 point. The other example you cite, JEC, is showing a return on equity =
of
 17.1% =E2=80=94 very strong and very desirable =E2=80=94 but earnings =
are growing in the
 mid-teens over the past four quarters. However, we might take into =
account
 the fact that JEC is a steady earnings performer, something that is at =
a
 premium in the current environment, and may benefit from current trends =
in
 that industry. So, again, we are weighing pluses and minuses and "going =
for
 it." >>

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