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The Calcbench Adjusted ROE Model!
Friday, October 21, 2016

Calcbench is delighted to announce that we’ve created a valuation model and to accomplish a difficult task in financial analysis: to measure and benchmark adjusted Return on Equity.

The valuation model is available to subscribers upon request; it has a few moving parts, and to make the model work for you we need to configure several variables. That effort doesn’t take much time, however, and after setup you can start evaluating companies to your heart’s content.

So why did we do this? Because ROE (net income divided by shareholder equity ) is one of the fundamental metrics financial analysts use to assess a company’s economic performance. At the same time, however, ROE can be a crude yardstick that doesn’t allow for easy, apples-to-apples comparison among multiple companies, since companies can adjust their calculations of net income and shareholder equity so many ways.

The Calcbench valuation model attempts to control for those variables, and then rates companies by adjusted ROE. That metric will give analysts better understanding of a company’s underlying economic vitality. It accounts for items such as operating lease expenses, LIFO inventory accounting, and pension gains or losses.

Financial analysts can do this exercise manually (conceptually, it’s the same as a DuPont Analysis), but Calcbench has pre-populated all those items into our valuation model to give you the answers you need more quickly.

A Bit More Detail

First, we adjusted for leverage, by taking the cost of operating leases into account and making adjustments for them. (The cost of operating leases are still technically off the balance sheet, until GAAP rules bring those costs back onto corporate balance sheets starting in 2019.) That adjustment is a bit technical to do, since operating lease costs are currently tucked away in the footnotes—but thanks to Calcbench’s database superpowers, as well as our operating lease template, we can do it.

Second, we adjusted for pension obligations by stripping out excess gains, which get reported on a company’s income statement.

Third, we attempt to adjust all inventory valuations to the LIFO method of calculating inventory.

Without those adjustments, you can’t get an accurate comparison of ROE because the distortions from those three effects can be very large. This is especially true if you’re trying to compare ROE for companies from different industries. The leasing effect for retail companies, for example, could be huge compared to the same effect for manufacturers.

As an example, here is a comparison of ROE and adjusted ROE for 10 companies we selected at random:

To take full advantage of our valuation model, then, we first need to know what companies you want to examine. We do the necessary adjusting to those companies’ line-items, and then run those adjusted numbers through our valuation model to get adjusted ROE.

Could we add other adjustments, for a custom-made valuation model? Upon request, sure. The challenge is to construct the right model, which we can do; and to have access to all the data that needs adjusting, which we have.

This valuation model is just one example of what you can do with Calcbench today, in a matter of hours or less. Our databases are just that good.


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