14 June 2011

ROEG - My thought on it

In my previous post regarding ROE, I always emphasize the earning power a company has in order to enjoy a sustainable grow in long term. You may refer to my previous posts on ROE to know about more on it.

Today, I would like to share with you my thought on ROEG (ROE Growth).

ROEG is similar to CAGR, except that I have linked the growth factor with the management performance and normalize it so that it can be compared among the peers. Please do remember that a grow in earning must be linked together with the risk involved.

If a company have 0% ROEG for quite a long time, it means that the company's competitive position in the industry is not changed much. Hence, we would like to know about the ROE of the company. If ROE is high and constant, means that the company has enjoyed the competitive edge for quite some time. For this type of companies, I would prefer to hold it for a long time.

In Residual Income Model, ROEG will not be positive for a long time. Hence, if I realized that a company having a positive ROEG for more than 3 years, I would like to investigate further on the reason why the company can achieve such a good result. It could be due to the reasons:
  • The company is in a growth industry. For instance in Malaysia, Glove Industry is expected to grow 10% constantly for a period of time.  Top Glove was once enjoyed high ROE AND positive ROEG for a period of time.
  • The company has a very competitive management that can grow the business. For instance, CIMB is expanding its business mainly in investment banking in South East Asia region. Maybank also acquire Kim Eng to expand its network in Thailand, Singapore and other countries.
If a company is having negative ROEG, then I will expect the company growth is slowing down and has lose the competitive edge against its peer or the whole industry is having a down time.

Anyway, we still require in depth analysis on the company so that we can have broader pictures on the company's movement.

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