Valuation tips – incremental ROE (06/05/2014)
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
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Aditya Asawa
:
This is really useful. I have a couple of questions though:
1. Does the method you have shown distinguish between if the original business is performing poorly vs the true return on incremental capital spent? For example, won’t the same result be true if the company’s original equity base and base business performed worse over time, even if the incremental equity they invested in other activities generated a strong ROE.
2. How do you account for one off downward adjustments to earnings and book equity such as writedowns? Do these boost ROE going forward (denominator effect) or do you add these back?
Roger Montgomery
:
The answer to the first question depends on whether additional capital is being deployed to keep running the additional business. The answer to the second question is that we are looking at ROE adjusted for one-offs.