Katelynn's Report

Katelynn's Report

(US Market)


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Return on Equity

Return on equity measures the percentage of return on shareholder's equity. In Katelynn's Report, it is calculated as Trailing 12 months Net Income/Shareholder's Equity * 100%. Return on equity generally reflects the efficiency of the management team in using equity investment to generate profit. Similar to most other financial ratios, return on equity can not be used independently to determine the performance of a business. For example, given the same amount of net income and total assets, return on equity could be higher in one company than another, because the former is financed mainly through debt (i.e. the proportion of equity is small), which is associated with a higher debt equity ratio (and higher leverage ratio too). Katelynn's Report assumes higher return on equity is generally more preferred (based on the assumption of holding other covariates as constant), and thus has better performance (i.e. higher quantile ranking).

Return on equity has industry and sector specific distribution. The figures below show the distributions of return on equity on the whole market (left), in technology sector (middle), and in consumer non-durable sector (right) as of 2017-01-20 (solid blue), compared with one year ago (dashed pink). The colored vertical lines marked the location of AAPL (Apple Inc.), GOOG (Alphabet Inc.), and KO (Coca cola Inc.)

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Majority of companies have return on equity less than 20%. If too high, it is better to double check the leverage ratio first. According to the distributions shown above, the return on equity is slightly better (higher) in consumer non-durable sector (than technology sector and whole market), which has less companies with negative return and has peak appeared right of the peak of technology sector. We also noticed a slight shift to left in both sectors, comparing with one year ago.