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Valuation tips – incremental ROE (06/05/2014)

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Valuation tips – incremental ROE (06/05/2014)

Tim joined Montgomery as Head of Research and Portfolio Manager of The Montgomery Fund in July 2012. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Before joining Gresham Partners, Tim worked for McKinsey & Company for four years, where he was involved in strategic consulting in both Australia and Denmark.


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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a financial advisor if necessary.


  1. 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?

    • 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.

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