Return on Equity: A Deep Dive into Corporate Performance 1998-2024

A Note:

Research serves as our window into the past, not a crystal ball for the future. While we cannot truly study what hasn't happened, we can dig deep into historical events for meaningful insights. This isn't about drawing straight lines to predict tomorrow's headlines but to better orient ones investing decisions with a better understanding of the past.

What is Return on Equity (ROE)?

Return on Equity (ROE) measures how effectively a company generates profits from shareholders' investments. Calculated as net income divided by shareholders' equity, ROE tells investors how many dollars of profit a company generates for each dollar of shareholders' equity.

Formula: ROE = Net Income ÷ Shareholders' Equity

For example, if a company has $100 million in net income and $500 million in shareholders' equity, its ROE would be 20%. This means the company generated 20 cents of profit for every dollar of shareholder investment.

Why ROE Matters to Investors

ROE is best used as a staring point informing deeper analysis at the company level by displaying which industries/business groups have the most potential.

It serves as a bench mark for:

Efficiency Measurement: ROE reveals how efficiently management uses shareholder capital to generate profits. A higher ROE generally indicates more effective use of investor funds.

Comparative Analysis: Investors can compare ROE across companies within the same industry to identify superior performers. It also helps track a company's performance over time.

Growth Potential: Companies with consistently high ROE often have competitive advantages that allow them to reinvest earnings at attractive rates, potentially fueling sustainable growth.

Investment Returns: ROE directly relates to the returns shareholders can expect on their investment, making it a key metric for investment decisions.

The Blind Spots: What ROE Doesn't Tell You

Despite its usefulness, ROE has significant limitations that investors must understand:

1. Financial Engineering

Companies can artificially inflate ROE through excessive borrowing. When a company takes on debt to buy back shares, it reduces shareholders' equity (the denominator) while potentially maintaining or increasing net income, thus boosting ROE. This creates the illusion of improved performance without actually enhancing operational efficiency.

2. Quality of Earnings

ROE doesn't distinguish between sustainable profits and one-time gains. A company might show high ROE due to asset sales, accounting changes, or other non-recurring items that don't reflect ongoing business performance.

3. Industry Context Ignored

ROE varies dramatically across industries due to different business models and capital requirements. Comparing a software company's ROE to a utility company's ROE provides little meaningful insight.

4. Growth Investment Penalty

Companies investing heavily in future growth may show temporarily lower ROE, even though these investments could generate superior long-term returns. ROE might unfairly penalize companies making smart strategic investments.

5. Asset Quality Blindness

Two companies with identical ROE might have vastly different asset quality. One might have modern, efficient assets while another relies on aging, depreciated equipment that inflates the ROE calculation.

(Data from Aswath Damadaran)

Note: Industries have come and gone, there are over 112 represented in data but only 30 that existed from 1998-2024 w/ complete data.

Industry Performance Analysis: Winners and Losers (1998-2024)

Based on comprehensive industry data spanning over two decades, clear performance patterns emerge:

Top 5 Performers by Average ROE

• Tobacco (47.9%): The clear winner, with consistently exceptional returns driven by strong brand loyalty and pricing power, despite declining consumption trends.

Tobacco Companies

Philip Morris International Inc. (NYSE:PM)

Altria Group, Inc. (NYSE:MO)

Universal Corporation (NYSE:UVV)

Turning Point Brands, Inc. (NYSE:TPB)

Ispire Technology Inc. (NasdaqCM:ISPR)

Pyxus International, Inc. (OTCPK:PYYX)

Charlie's Holdings, Inc. (OTCPK:CHUC)

22nd Century Group, Inc. (NasdaqCM:XXII)

TAAT Global Alternatives Inc. (CNSX:TAAT)

1606 Corp. (OTCPK:CBDW)

Wee-Cig International Corporation (OTCPK:WCIG)

Hempacco Co., Inc. (OTCPK:HPCO)

• Broadcasting (42.5%): Media companies leveraged content libraries and advertising revenue to generate strong returns, though recent years show increased volatility.

Broadcasting Companies

Fox Corporation (NasdaqGS:FOXA)

Paramount Global (NasdaqGS:PARA)

Nexstar Media Group, Inc. (NasdaqGS:NXST)

TEGNA Inc. (NYSE:TGNA)

Sinclair, Inc. (NasdaqGS:SBGI)

AMC Networks Inc. (NasdaqGS:AMCX)

Gray Media, Inc. (NYSE:GTN)

iHeartMedia, Inc. (NasdaqGS:IHRT)

The E.W. Scripps Company (NasdaqGS:SSP)

Townsquare Media, Inc. (NYSE:TSQ)

Saga Communications, Inc. (NasdaqGM:SGA)

MediaCo Holding Inc. (NasdaqCM:MDIA)

Urban One, Inc. (NasdaqCM:UONE.K)

Emmis Corporation (OTCPK:EMMS)

Salem Media Group, Inc. (OTCPK:SALM)

Beasley Broadcast Group, Inc. (NasdaqCM:BBGI)

Cumulus Media Inc. (NasdaqGM:CMLS)

Conservative Broadcast Media & Journalism Inc. (OTCPK:CBMJ)

Spanish Broadcasting System, Inc. (OTCPK:SBSA.A)

The Marquie Group, Inc. (OTCPK:TMGI)

Urban Television Network Corporation (OTCPK:URBT)

Superhero Scramble, Inc. (OTCPK:WNRC)

• Computers/Peripherals (30.4%): Technology hardware companies benefited from the digital transformation, though performance has become more cyclical recently.

Computer/Peripherals Companies

Apple Inc. (NasdaqGS:AAPL)

Dell Technologies Inc. (NYSE:DELL)

HP Inc. (NYSE:HPQ)

Hewlett Packard Enterprise Company (NYSE:HPE)

NetApp, Inc. (NasdaqGS:NTAP)

Western Digital Corporation (NasdaqGS:WDC)

Pure Storage, Inc. (NYSE:PSTG)

Super Micro Computer, Inc. (NasdaqGS:SMCI)

IonQ, Inc. (NYSE:IONQ)

Diebold Nixdorf, Incorporated (NYSE:DBD)

CompoSecure, Inc. (NasdaqGM:CMPO)

Xerox Holdings Corporation (NasdaqGS:XRX)

Corsair Gaming, Inc. (NasdaqGS:CRSR)

Eastman Kodak Company (NYSE:KODK)

Turtle Beach Corporation (NasdaqGM:HEAR)

CPI Card Group Inc. (NasdaqGM:PMTS)

Immersion Corporation (NasdaqGS:IMMR)

Quantum Corporation (NasdaqGM:QMCO)

Intevac, Inc. (NasdaqGS:IVAC)

AstroNova, Inc. (NasdaqGM:ALOT)

One Stop Systems, Inc. (NasdaqCM:OSS)

Foxx Development Holdings Inc. (NasdaqCM:FOXX)

TransAct Technologies Incorporated (NasdaqGM:TACT)

Movano Inc. (NasdaqCM:MOVE)

Helo Corp. (OTCPK:HLOC)

Sonim Technologies, Inc. (NasdaqCM:SONM)

Socket Mobile, Inc. (NasdaqCM:SCKT)

Qualstar Corporation (OTCPK:QBAK)

Video Display Corporation (OTCPK:VIDE)

Boxlight Corporation (NasdaqCM:BOXL)

Vartech Systems Inc. (OTCPK:VRTK)

Veritec, Inc. (OTCPK:VRTC)

Cardxx Inc. (OTCPK:CXCQ)

Hauppauge Digital Inc. (OTCPK:HAUP)

ViewCast.com, Inc. (OTCPK:VCST)

• Beverage (Soft Drink) (29.9%): Established beverage brands maintained consistent high returns through strong distribution networks and brand recognition.

Soft Drink Companies

PepsiCo, Inc. (NasdaqGS:PEP)

Monster Beverage Corporation (NasdaqGS:MNST)

Keurig Dr Pepper Inc. (NasdaqGS:KDP)

Primo Brands Corporation (NYSE:PRMB)

Coca-Cola Consolidated, Inc. (NasdaqGS:COKE)

Celsius Holdings, Inc. (NasdaqCM:CELH)

National Beverage Corp. (NasdaqGS:FIZZ)

The Vita Coco Company, Inc. (NasdaqGS:COCO)

Zevia PBC (NYSE:ZVIA)

Reed's, Inc. (OTCPK:REED)

Jones Soda Co. (OTCPK:JSDA)

Revium Recovery Inc. (OTCPK:RVRC)

Apple Rush Company, Inc. (OTCPK:APRU)

EQUATOR Beverage Company (OTCPK:MOJO)

Yerbaé Brands Corp. (TSXV:YERB.U)

Rocky Mountain High Brands, Inc. (OTCPK:RMHB)

Greene Concepts, Inc. (OTCPK:INKW)

Golden Grail Technology Corp. (OTCPK:GOGY)

Nova Tech Enterprises, Inc. (OTCPK:NTEI)

NOHO, Inc. (OTCPK:DRNK)

ThermaFreeze Products Corporation (OTCPK:TZPC)

Accredited Solutions, Inc. (OTCPK:ASII)

FBEC Worldwide, Inc. (OTCPK:FBEC)

DNA Brands, Inc. (OTCPK:DNAX)

The Alkaline Water Company Inc. (OTCPK:WTER)

CirTran Corporation (OTCPK:CIRX)

Sports Pouch Beverage Co., Inc. (OTCPK:SPBV)

High Performance Beverages Company (OTCPK:TBEV)

• Retail (Automotive) (29.9%): Auto retailers capitalized on vehicle replacement cycles and service revenue, showing particularly strong recent performance (47% in 2024).

Automotive Retail

O'Reilly Automotive, Inc. (NasdaqGS:ORLY)

AutoZone, Inc. (NYSE:AZO)

Carvana Co. (NYSE:CVNA)

CarMax, Inc. (NYSE:KMX)

Penske Automotive Group, Inc. (NYSE:PAG)

Murphy USA Inc. (NYSE:MUSA)

Lithia Motors, Inc. (NYSE:LAD)

AutoNation, Inc. (NYSE:AN)

Group 1 Automotive, Inc. (NYSE:GPI)

Asbury Automotive Group, Inc. (NYSE:ABG)

Valvoline Inc. (NYSE:VVV)

Advance Auto Parts, Inc. (NYSE:AAP)

Sonic Automotive, Inc. (NYSE:SAH)

Camping World Holdings, Inc. (NYSE:CWH)

Arko Corp. (NasdaqCM:ARKO)

Monro, Inc. (NasdaqGS:MNRO)

EVgo, Inc. (NasdaqGS:EVGO)

America's Car-Mart, Inc. (NasdaqGS:CRMT)

OneWater Marine Inc. (NasdaqGM:ONEW)

RumbleOn, Inc. (NasdaqCM:RMBL)

CarParts.com, Inc. (NasdaqGS:PRTS)

Lazydays Holdings, Inc. (NasdaqCM:GORV)

Nxu, Inc. (NasdaqCM:NXU)

Vroom, Inc. (OTCPK:VRMM.Q)

Azure Holding Group Corp. (OTCPK:AZRH)

LMP Automotive Holdings, Inc. (OTCPK:LMPX)

Nano Mobile Healthcare, Inc. (OTCPK:VNTH)

Victory Marine Holdings Corp. (OTCPK:VMHG)

Auto Parts 4Less Group, Inc. (OTCPK:FLES)

Bottom 5 Performers by Average ROE

• Biotechnology (2.8%): Heavy R&D investments and regulatory risks resulted in the lowest average returns, with significant volatility between positive and negative years.

• Auto Parts (8.4%): Automotive suppliers faced margin pressure from OEM customers and cyclical demand patterns.

• Advertising (9.9%): The advertising industry struggled with digital disruption and economic sensitivity, showing high volatility.

• Oil/Gas Production (10.4%): Energy exploration companies faced commodity price volatility and high capital intensity, though recent years have improved dramatically.

• Auto & Truck (11.2%): Traditional automakers dealt with high capital requirements, cyclical demand, and recently, expensive transitions to electric vehicles.

  
  
  
  

Notable Trends and Volatility

Extreme Volatility Champions

The data reveals that some industries experience dramatic ROE swings:

• Tobacco: Despite high average returns, showed extreme volatility (66.1% standard deviation), including a remarkable 214.7% ROE in 2013 followed by negative returns in recent years.

• Broadcasting: Highly cyclical with ROE ranging from -2% to 93.4% within just five years, reflecting the industry's advertising dependency and streaming disruption.

• Oil & Gas Exploration: Commodity cycle impacts created wild swings, from -39% in 2016 to +47% in 2022.

  
  

Recent Performance Shifts (2019-2024)

The pandemic and economic changes created significant industry performance shifts:

Major Declines:

• Broadcasting fell from 93.4% to -2% (down 95.4 percentage points)

• Computers/Peripherals dropped from 40% to 0% (down 40 percentage points)

• Advertising declined from 26% to 3% (down 23.1 percentage points)

Strong Gainers:

• Oil/Gas Production surged from 6.4% to 31% (up 24.6 percentage points)

• Household Products improved from 10.6% to 27% (up 16.4 percentage points)

• Retail Automotive grew from 34.6% to 47% (up 12.4 percentage points)

Using ROE Effectively

To maximize ROE's analytical value:

1. Compare Within Industries: Only compare companies in similar sectors with comparable business models.

2. Examine Trends: Look at ROE trends over multiple years rather than single-year snapshots.

3. Investigate Components: Analyze what drives ROE changes - is it improving margins, asset efficiency, or financial leverage?

4. Consider Context: Evaluate ROE alongside debt levels, growth investments, and industry conditions.

5. Supplement with Other Metrics: Use ROE alongside return on assets (ROA), profit margins, and debt ratios for a complete picture.

   
   

Conclusion

ROE remains one of the most valuable metrics for assessing corporate performance and comparing investment opportunities. However, like any financial ratio, it requires careful interpretation within proper context. The dramatic differences between industries - from biotechnology's research-heavy 2.8% average to tobacco's brand-powered 47.9% - underscore the importance of understanding business fundamentals behind the numbers.

Smart investors use ROE as a starting point for analysis, not an ending point. Combined with other financial metrics and qualitative factors, ROE can help identify companies that efficiently convert shareholder investments into profits, while avoiding the pitfalls of financial engineering or unsustainable business practices.

The data spanning 1998-2024 demonstrates that while some industries consistently generate superior returns, all sectors face periods of volatility and challenge. The key is understanding what drives these patterns and using that knowledge to make more informed investment decisions.