How to calculate Return on Equity?

[jke_brown]

1/ Retain some shareholder equity AND
2/ invest that new equity at an historic high rate

SNOOPY

good point. lets look at retained earnings. so how do you know if the company is using that retained earnings to make higher return at a historic high rate?

Lets look at dividend paid by telecom nz from 2002 to 2007. during that period total EPS was $3.038 (from my table above)

From that $1.975 was paid in dividend. (from http://www.telecom.co.nz/content/0,8...,00.html?nv=sd)

So telecom nz retained $1.063. During that period share price moved from $4.66 to $4.47.
gain of -0.19 dollars

so assuming all of the retained equity used increase earnings.

return percentage= (-0.19/1.063)*100= -17.87%

But looking at dividend payments and earning per share over the same period.

So dividend return = dividend/eps = 1.975/3.038= 65%

This value seems very high. I am sure I did the calculation correct. So Telecom nz has outstanding dividend return over the same period but negative growth from retained equity.

with a one or two year time horizon looks hard to justifySNOOPY

this make sense as investors who were not in for the long term didn’t get the high dividend return.

Snoopy, how can one relate ROE to the share price ('nominally worth') mathematically?

As you say market will “bidding up the price of shares to more than they are 'nominally worth', thus reducing your return for any new shares you buy 'on market'

In 2007.
Dollar equity in telecom nz is creating 26c in return.
Dollar equity invested in ASB bank term deposit is crating 8.5c in return.

Dollar invested in the bank has a fixed value, where as dollar equity in telecom nz has a “variable value” due to market dynamics.

My previous post attempted to calculate the fair value, is that accurate?

Most of Warrens concepts like competitive advantage etc are easy to apply but in terms of calculating the nominal value I haven’t found an appropriate equation/method by him.