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Author: MarkMarcellus Big red star, 1000 posts Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1936  
Subject: Re: Valuing retained earnings ... Date: 5/24/2000 1:21 AM
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(Y2_Ret'd_Earnings - Y1_Ret'd_Earnings) / ((Y1_Ret'd_Earnings + Y2_Ret'd_Earnings) / 2)

All the equation is doing is giving you the increase in RE over the average RE for the last two years. That is, Y1 is 10, Y2 is 20, so the two year average is 15. Y2 is 67% higher than the two year average.

What am I missing?

Essentially, what this formula gives you is the return on the company's marginal investment. It is one answer to the question "is the company doing a better job reinvesting my money than I could?". Think of the denominator as the additional equity invested in the company (using an average to approximate the correct amount for the entire period). The numerator is (theoretically) the additional growth that was generated from that investment. The result, expressed as a percentage, is the return the company generated from the money they chose not to give back to you.

Companies which do well on this metric also tend to do well on others. Since this one is quite easy to calculate, it is a good place to start.
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