I just learned of an Easter Egg in Section 2, of Tool Kit 5.  By typing "Alt R" you can change the % Earned on Equity Ratio from (EPS / Book Value) to (EPS / Book Value of the Previous Year).  What is the advantage of using this new ratio?

John Tufts 

John:

At 09:38 PM 12/4/2007, you wrote:

> From the The Toolshed forum at StockCentral.com, John Tufts writes:

> I just learned of an Easter Egg in Section 2, of Tool Kit 5. By
> typing "Alt R" you can change the % Earned on Equity Ratio from
> (EPS / >Book Value) to (EPS / Book Value of the Previous Year).
> What is the >advantage of using this new ratio?

There are a bunch of reasons for doing this; and they all boil down to the fact that ROE, when calculated using any equity other than beginning equity can produce skewed and misleading results. For a thorough discussion of this issue, I invite you to read the following: www.financialiteracy.us/et/AAII_ROE_Article.pdf (I've also attached it in case you can't download it from here.)

Simply stated, if you had $10 and made $1 on it, what would your percent return be? If you said 10%, you'd be right. Now look at the SSG and see what you would be doing if you followed what it says in 2B: You would get 9.1% for an answer because the denominator in the calculation would be $11 and not $10.

ET

----- Original Message -----

From: toolshed@stockcentral.com

To: jmtufts@Bresnan.net

Sent: Tuesday, December 04, 2007 8:19 PM

Subject: [SPAM] [StockCentral.com] Tool Kit 5, Section 2 (18bda102-78a6-4477-8e05-8f8cb0ab1633)

A message was posted to a thread you are tracking.

ETraub Posted:12/05/2007 3:19 AM

Subject: [StockCentral.com] Tool Kit 5, Section 2 John: At 09:38 PM 12/4/2007, you wrote: > From the The Toolshed forum at StockCentral.com, John Tufts writes: >I just learned of an Easter Egg in Section 2, of Tool Kit 5. By >typing "Alt R" you can change the % Earned on Equity Ratio from (EPS / >Book Value) to (EPS / Book Value of the Previous Year). What is the >advantage of using this new ratio? There are a bunch of reasons for doing this; and they all boil down to the fact that ROE, when calculated using any equity other than beginning equity can produce skewed and misleading results. For a thorough discussion of this issue, I invite you to read the following: www.financialiteracy.us/et/AAII_ROE_Article.pdf (I've also attached it in case you can't download it from here.) Simply stated, if you had $10 and made $1 on it, what would your percent return be? If you said 10%, you'd be right. Now look at the SSG and see what you would be doing if you followed what it says in 2B: You would get 9.1% for an answer because the denominator in the calculation would be $11 and not $10. ET Attachment: AAII_ROE_Article.pdf

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