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ROE, Returns to Shareholders, Good/Bad Companies and Efficient Markets: Back to Basics
Description
My session on profitability in companies around the world, and the measurement of excess returns as the difference between return on equity (capital) and cost of equity (capital) gave rise to comments that suggest to me that there is confusion about what accounting returns mean and what exactly makes for an efficient market. In this session, I use a very simple example of two businesses, one in a good business and the other in a bad one, that I use to explain the contract between accounting returns and returns to shareholders in markets, between book value and market value and between good and bad companies. I apologize if you find it simplistic, but sometime keeping it simple is the basis for the best insights.
Slides: https://pages.stern.nyu.edu/~adamodar/pdfiles/blog/ROESimple.pdf
Blog Post: https://aswathdamodaran.blogspot.com/2025/02/return-on-equity-earnings-yield-and.html
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