Essay: The Concept of ROE

Sample Essay

The analysis of article in reply to question 3 is quite outstanding as it explains each and every component of the ROE equation. The concept of ROE is explained regarding its relationship with the profit margin, asset turnover and asset to equity ratio. The impact of each component on ROE has been explained in an efficient manner and gives a good understanding of ROE and the various elements affecting ROE.

The problematic area in reply to the first two questions is that the student has failed to identify or present the main theme covered in the article which is the valuation of stocks. The concept of cash flows, EBIT and EBITDA which eventually lead to the valuation of stocks have been explained but the actual valuation of stocks is missing from the reply and should have been presented as the core concept. The best way to approach this area was to gain insight from books or scholarly articles on valuation of stocks. The relationship of cash flows, EBIT and EBITDA should have been highlighted more clearly and thoroughly in light of come academic reference (Koller, Goedhart & Wessels, 2005).

The reply to the third question is based on the ROE equation and its components. The explanation of this equation should have been presented with reference to the DuPont analysis and other important component of the DuPont analysis which is ROA. The relevant extension from the ROA equation should have been implied extensively (Weaver & Weston, 2001).

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