Question

In one of the presentations, I compared the ROE of Apple for FY 2011 to the ROE of DELL for FY 2012. Rounding to 2 decimal places, they both have an ROE equal to .42 ( or 42%). Given that they both have the an ROE of 42%, do you think that an investor who is only worried about ROE would be indifferent between the two companies? Please explain in detail. Please limit your answer to the space provided on the answer sheet.      

Answer 1

No, the investor who is only looking for the return on equity and even though return on equity of both Apple and Dell are similar will not be indifferent between both the companies, because he will have to look at the capital structure of the company and the risk which has been taken by the company in order to generate profits and he will not be just looking at the return on equity because some companies are only having a very thin amount of equity capital in order to make the rate of return, and some companies will be having a higher amount of equity capital so those company which can earn a higher amount of return from a higher base of equity capital will be preferred and it should also be discounted that those companies which are taking minimal risk in order to generate the maximum return on equity are always preferred by the investor because investors are always looking for lower risk, so this investor will not be indifferent between Apple and Dell even though is looking for the return on equity.