8. More on ratio analysis industry. ROE is considered a very important measure,
ID: 2818268 • Letter: 8
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8. More on ratio analysis industry. ROE is considered a very important measure, and managers strive to make the company's ROE numbers look good. and investors often use returm on equity (ROE) to compare profitability of a company with other fims in the An increase in ROE would imply an increase in shareholder wealth. Based on your understanding of the uses and limitations of ROE, a rational investor is likely to prefer an investment option that has: 0 High ROE and low risk O High ROE and high risk Suppose you are trying to decide whether to invest in a company that generates a high expected ROE, and you want to conduct further analysis on the company's performance. If you wanted to conduct a comparative analysis for the current year, you would: O Compare the firm's financial ratios with other firms in the industry for the.current year O Compare the fim's financial ratios for the current year with its ratios in previous years You decide also to conduct a quaitative enalysis based on the factors summerized by the American Association of Investors (AAIl). According to your understanding, a company with one key customer is considered to be risky than companies with several customers Individual
Explanation / Answer
An increase in ROE would SOMETIMES imply increase in shareholders' wealth. (ROE can be deceptive at times as well, as it may also be due to reduction in shareholders' equity as company might have taken higher amount of debt).
A rational investor is likely to prefer HIGH ROE and LOW RISK which is consistent with the fact that a rational investor would like to earn higher return at a give level of risk or take lowest risk at a given level of return.
If we want to conduct a comparative analysis for current year, you would Compare the firm's financial ratios with other firms in industry for the current year.
According to your understanding, a company with one key customer is considered to be MORE risky than companies with several customers.
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