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Author: StevnFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212833  
Subject: Influence on ROE in Investing returns Date: 10/4/2012 6:35 PM
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Jim has mentioned several times about how a good company performance 
will show up in the sustainable ROE numbers.

I decided to do a test.  It is not very scientific as I just use the 30 
DOW constituents.  I used these because of the easy availability of the 
ROE numbers for the last 10 years (2002 - 2011) from Valueline.

ROE10 is the average ROE over the last 10 years where provided by 
Valueline.  Note that numbers less than 0 and > 100% are reported by 
them as NMF.  I manually calculated these.  I think there were only 2 
companies where I didn't have the full 10 year history of ROE but I 
just averaged what I had.

R10, R15 and R20 are the annualized total returns over the last 10, 15 
and 20 years.

I sorted descending by ROE10 and then grouped them into 5 quintiles of 
6 companies each.

ROE10	R10	R15	R20
			
37.5%	10.7%	7.0%	12.2%
27.1%	7.6%	6.1%	10.8%
21.6%	11.3%	10.9%	13.1%
17.6%	5.0%	3.4%	10.7%
10.9%	7.9%	2.4%	7.9%

Make of it what you will but I done think it actually shows a very strong 
correlation.  For example, if I remove the bottom company (AA) from the 
bottom quintile, the 5 remaining companies average:

ROE10	R10	R15	R20

11.6%	10.6%	3.6%	9.1%


Obviously this takes no account of the type of business or the valuation 
levels at the start and end of the periods.

This probably needs a much broader study to be of any use but I thought I'd
post it anyway.

StevnFool
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