America's Corporate Shell Game
My friend John Seely Brown just sent me a report from his Deloitte Center for The Edge called The Shift Index. They make no attempt to hide the bad news for the U.S. Economy–“return on assets for U.S. companies has steadily fallen to almost one quarter of 1965 levels,at the same time that we have seen continued, albeit much more modest, improvements in labor productivity.” The meaning of this is staggering–any productivity gains from the digital revolution have been more than wiped out by our corporate (as well as personal) addiction to debt. To understand this, it’s important to grasp the difference between return on equity (the classic Wall Street measurement) and return on assets. A case study of General Motors from 2003, when SUV’s were selling like hot cakes and the management was touting it’s ROE is instructive.
Let’s calculate ROE for the automotive giant General Motors for 2003. To get the necessary data, go to the GM’s Investor Information website and look for the2003 Annual Report. You’ll see on GM‘s 2003 Income Statement that its net income totaled $3.822 billion. On GM’s 2003 Balance Sheet, you’ll find total stockholder equity for 2003 was $25.268bn and in 2002 it was $6.814bn.
To calculate ROE, average shareholders’ equity for 2003 and 2002 ($25.268bn + $6.814bn / 2 = $16.041 bn), and divide net income for 2003 ($3.822bn) by that average. You will arrive at a return on equity of 0.23, or 23%. This tells us that in 2003 GM generated a 23% profit on every dollar invested by shareholders.
Many professional investors look for a ROE of at least 15%. So, by that standard alone, GM managements’ ability to squeeze profits from shareholders’ money appears rather impressive.
Now, let’s turn to return on assets, which, offering a different take on management’s effectiveness, reveals how much profit a company earns for every dollar of its assets. Assets include things like cash in the bank,accounts receivable, property, equipment, inventory and furniture. ROA is calculated like this:
Return on Assets = (Annual Net Income/Total Assets)
Let’s look at GM again. You already know that it earned $3.822bn in 2003, and you can find total assets on the balance sheet. In 2003, GM’s total assets amounted to $448.507bn. GM’s net income divided by total assets gives a return on assets of 0.0085, or 0.85%. This tells us that in 2003 GM earned less than 1% profit on the resources it owned.
This is an extremely low number. In other words, GM’s ROA tells a very different story about the company’s performance than its ROE.The big factor that separates ROE and ROA is financial leverage, or debt. The balance sheet’s fundamental equation shows how this is true: assets = liabilities + shareholders’ equity. This equation tells us that if a company carried no debt, its shareholders’ equity and its total assets would be the same. It follows then that their ROE and ROA would also be the same.
ROA gives an idea as to how efficient management is at using its assets to generate earnings. If Wall Street and investors had been focusing on GM’s ROA in 2003, they would have seen that it was a train wreck about to happen.
But it’s not just GM as the Deloitte report points out, it’s the whole corporate economy. By masking their absolutely dismal performance in the last 40 years in ROA, by taking on more and more debt to juice ROE, both Wall Street and America’s corporate elite are engaged in a massive shell game, in which the average investor is the mark. The Deloitte study points out the real game, although in somewhat opaque language–”While the performance of U.S. firms is deteriorating, at least some of the benefits of the productivity improvements appear to be captured by creative talent, which is experiencing greater growth in total compensation.” I love the term “creative talent” as if we were talking about Steven Spielberg, instead of some CEO who is good at massaging the numbers of his company in creative ways, so as trigger his stock options.
Six months ago I wrote about the role of Mike Milken in transforming the economy from ROA metrics to ROE metrics by creating the Junk Bond. Milken started in the early 1970′s and by the time he went to jail in 1991, any company that wasn’t leveraged to the gills was a target of a corporate raider or private equity baron.
It’s time to return to sanity. The Wall Street analytical community must start using ROA as a key performance measurement. The folks at the Center for the Edge have some great ideas about how we can increase ROA through knowledge flows. But until we recognize the basic problem we are living in a fools paradise.
Yet another reason for exuberant optimism.
Yet another reason for exuberant optimism.
Yet another reason for exuberant optimism.
Would heads on pikes help encourage a return to sanity? There does not appear to be any other incentive or regulatory measure that can’t be jiggered by the figger’ers a-floatin’ in their dreams of The Next Bubble…
Would heads on pikes help encourage a return to sanity? There does not appear to be any other incentive or regulatory measure that can’t be jiggered by the figger’ers a-floatin’ in their dreams of The Next Bubble…
Would heads on pikes help encourage a return to sanity? There does not appear to be any other incentive or regulatory measure that can’t be jiggered by the figger’ers a-floatin’ in their dreams of The Next Bubble…
Maybe split the difference: bubbles on pikes.
Maybe split the difference: bubbles on pikes.
Maybe split the difference: bubbles on pikes.
I’ve worked for many of those companies that juggled the pea by squeezing both the employees and shareholders only to go bankrupt when the cash flow could no longer be masked with glossy reports.
I’ve worked for many of those companies that juggled the pea by squeezing both the employees and shareholders only to go bankrupt when the cash flow could no longer be masked with glossy reports.
I’ve worked for many of those companies that juggled the pea by squeezing both the employees and shareholders only to go bankrupt when the cash flow could no longer be masked with glossy reports.
And http://www.economist.com/opinion/displaystory.cfm?story_id=13829461/opinion/displaystory.cfm?story_id=13829461” rel=”nofollow”>here’s one for Guten Morgan, and his desire to crush the older folks to ensure maximal titillation of the younger:
“Yet nothing sends a stronger signal than taking difficult decisions today. One priority is to raise the retirement age, which would boost tax revenues (as people work longer) and cut future pension costs. Many rich countries are already doing this, but they need to go further and faster. Another huge target is health care. America has the most wasteful system on the planet. Its fiscal future would be transformed if Congress passed reforms that emphasised control of costs as much as the expansion of coverage that Barack Obama rightly wants.
All this is a tall order. Politicians have failed to control the costs of ageing populations for years. Paradoxically, the financial bust, by adding so much debt, may boost the chances of a breakthrough. If not, another financial catastrophe looms.”
Here’s a little fillip on this tale. You give some simplified math on Return On Equity and Return On Assets. I’m not smart enough to figure out how to express Return On Worker Units, but in an earlier post you highlighted the indicia of the New Slavery, the increase in productivity matched against the wage curve – or flatline. This bit from the Economist provides the rationale for actual wage and work hour CUTS>/ a> for people who still have jobs with traditional employers.
I worked for a middle-size niche retailer for like 8 years, during which time the cachet that made it popular was frittered away by the MBA “I know how to sell stuff” late-coming vampires who siphoned off its “good will” and trashed the workforce that made it special. To the point that if you wanted even the minimum 32 hours to keep diminishing health insurance benefits, you had to burn through your leave and “sick” time to both keep enough hours and keep something in the way of a steady income.
I especially like the part in the link about the $20-million-a-year CEO taking a “20% pay cut” (love to see the actual 5-year tax returns to check the actuality of THAT “sacrifice”), and the loyal employees then accepting that they at $15 or $20 per hour should in good conscience do the same, and be “allowed” fewer work hours, with the few still standing expected to do as much or more in the same shrunken work time.
From the link: “In a society known for competitive individualism, pay cuts and furloughs are calling forth a spirit of collectivism. Hewlett-Packard, Advanced Micro Devices and FedEx have trimmed rank-and-file pay, but their chief executives have taken 20% pay cuts, says Challenger, Gray and Christmas, an outplacement consultancy. Slumping tax collections forced city administrators in Lima, Ohio, to draw up contingencies for a 10% cut in hours for all but emergency workers. But first the city’s eight most senior administrators gave up a 2.5% pay rise.”
Wow.
And then there’s the elephant in the room: The most enormous theft of wealth from the future, EVER.
Our consumption behaviors have all been in the general direction of stealing from the future, whether it’s depleting forests or fish or petroleum or topsoil or species diversity or CDOs and similar succubi, or just setting up threat-based tribal-loyalty political structures and conflicts that profit the few at the expense of the many. But even in Derivatives Forever BubbleLand, it looks like we can crow about a New First! A Highest and Biggest and Baddest Scam! We’re Number One! Here, son/grandson/daughter, here’s the chit I wrote for you, an IOU for each of you, in your name, for at least $50,000 present-value dollars, payable now, to me, from the “wealth” created by the belief that someday, whatever you might do, you will be able to pay back that IOU with interest. With enough left over to live on.
My money is on Ragnarok over Interregnum, this time around at least.
And http://www.economist.com/opinion/displaystory.cfm?story_id=13829461/opinion/displaystory.cfm?story_id=13829461” rel=”nofollow”>here’s one for Guten Morgan, and his desire to crush the older folks to ensure maximal titillation of the younger:
“Yet nothing sends a stronger signal than taking difficult decisions today. One priority is to raise the retirement age, which would boost tax revenues (as people work longer) and cut future pension costs. Many rich countries are already doing this, but they need to go further and faster. Another huge target is health care. America has the most wasteful system on the planet. Its fiscal future would be transformed if Congress passed reforms that emphasised control of costs as much as the expansion of coverage that Barack Obama rightly wants.
All this is a tall order. Politicians have failed to control the costs of ageing populations for years. Paradoxically, the financial bust, by adding so much debt, may boost the chances of a breakthrough. If not, another financial catastrophe looms.”
Here’s a little fillip on this tale. You give some simplified math on Return On Equity and Return On Assets. I’m not smart enough to figure out how to express Return On Worker Units, but in an earlier post you highlighted the indicia of the New Slavery, the increase in productivity matched against the wage curve – or flatline. This bit from the Economist provides the rationale for actual wage and work hour CUTS>/ a> for people who still have jobs with traditional employers.
I worked for a middle-size niche retailer for like 8 years, during which time the cachet that made it popular was frittered away by the MBA “I know how to sell stuff” late-coming vampires who siphoned off its “good will” and trashed the workforce that made it special. To the point that if you wanted even the minimum 32 hours to keep diminishing health insurance benefits, you had to burn through your leave and “sick” time to both keep enough hours and keep something in the way of a steady income.
I especially like the part in the link about the $20-million-a-year CEO taking a “20% pay cut” (love to see the actual 5-year tax returns to check the actuality of THAT “sacrifice”), and the loyal employees then accepting that they at $15 or $20 per hour should in good conscience do the same, and be “allowed” fewer work hours, with the few still standing expected to do as much or more in the same shrunken work time.
From the link: “In a society known for competitive individualism, pay cuts and furloughs are calling forth a spirit of collectivism. Hewlett-Packard, Advanced Micro Devices and FedEx have trimmed rank-and-file pay, but their chief executives have taken 20% pay cuts, says Challenger, Gray and Christmas, an outplacement consultancy. Slumping tax collections forced city administrators in Lima, Ohio, to draw up contingencies for a 10% cut in hours for all but emergency workers. But first the city’s eight most senior administrators gave up a 2.5% pay rise.”
Wow.
And then there’s the elephant in the room: The most enormous theft of wealth from the future, EVER.
Our consumption behaviors have all been in the general direction of stealing from the future, whether it’s depleting forests or fish or petroleum or topsoil or species diversity or CDOs and similar succubi, or just setting up threat-based tribal-loyalty political structures and conflicts that profit the few at the expense of the many. But even in Derivatives Forever BubbleLand, it looks like we can crow about a New First! A Highest and Biggest and Baddest Scam! We’re Number One! Here, son/grandson/daughter, here’s the chit I wrote for you, an IOU for each of you, in your name, for at least $50,000 present-value dollars, payable now, to me, from the “wealth” created by the belief that someday, whatever you might do, you will be able to pay back that IOU with interest. With enough left over to live on.
My money is on Ragnarok over Interregnum, this time around at least.
And http://www.economist.com/opinion/displaystory.cfm?story_id=13829461/opinion/displaystory.cfm?story_id=13829461” rel=”nofollow”>here’s one for Guten Morgan, and his desire to crush the older folks to ensure maximal titillation of the younger:
“Yet nothing sends a stronger signal than taking difficult decisions today. One priority is to raise the retirement age, which would boost tax revenues (as people work longer) and cut future pension costs. Many rich countries are already doing this, but they need to go further and faster. Another huge target is health care. America has the most wasteful system on the planet. Its fiscal future would be transformed if Congress passed reforms that emphasised control of costs as much as the expansion of coverage that Barack Obama rightly wants.
All this is a tall order. Politicians have failed to control the costs of ageing populations for years. Paradoxically, the financial bust, by adding so much debt, may boost the chances of a breakthrough. If not, another financial catastrophe looms.”
Here’s a little fillip on this tale. You give some simplified math on Return On Equity and Return On Assets. I’m not smart enough to figure out how to express Return On Worker Units, but in an earlier post you highlighted the indicia of the New Slavery, the increase in productivity matched against the wage curve – or flatline. This bit from the Economist provides the rationale for actual wage and work hour CUTS>/ a> for people who still have jobs with traditional employers.
I worked for a middle-size niche retailer for like 8 years, during which time the cachet that made it popular was frittered away by the MBA “I know how to sell stuff” late-coming vampires who siphoned off its “good will” and trashed the workforce that made it special. To the point that if you wanted even the minimum 32 hours to keep diminishing health insurance benefits, you had to burn through your leave and “sick” time to both keep enough hours and keep something in the way of a steady income.
I especially like the part in the link about the $20-million-a-year CEO taking a “20% pay cut” (love to see the actual 5-year tax returns to check the actuality of THAT “sacrifice”), and the loyal employees then accepting that they at $15 or $20 per hour should in good conscience do the same, and be “allowed” fewer work hours, with the few still standing expected to do as much or more in the same shrunken work time.
From the link: “In a society known for competitive individualism, pay cuts and furloughs are calling forth a spirit of collectivism. Hewlett-Packard, Advanced Micro Devices and FedEx have trimmed rank-and-file pay, but their chief executives have taken 20% pay cuts, says Challenger, Gray and Christmas, an outplacement consultancy. Slumping tax collections forced city administrators in Lima, Ohio, to draw up contingencies for a 10% cut in hours for all but emergency workers. But first the city’s eight most senior administrators gave up a 2.5% pay rise.”
Wow.
And then there’s the elephant in the room: The most enormous theft of wealth from the future, EVER.
Our consumption behaviors have all been in the general direction of stealing from the future, whether it’s depleting forests or fish or petroleum or topsoil or species diversity or CDOs and similar succubi, or just setting up threat-based tribal-loyalty political structures and conflicts that profit the few at the expense of the many. But even in Derivatives Forever BubbleLand, it looks like we can crow about a New First! A Highest and Biggest and Baddest Scam! We’re Number One! Here, son/grandson/daughter, here’s the chit I wrote for you, an IOU for each of you, in your name, for at least $50,000 present-value dollars, payable now, to me, from the “wealth” created by the belief that someday, whatever you might do, you will be able to pay back that IOU with interest. With enough left over to live on.
My money is on Ragnarok over Interregnum, this time around at least.
On GM’s 2003 Balance Sheet, you’ll find total stockholder equity for 2003 was $25.268bn and in 2002 it was $6.814bn.
How did GM increase its equity by $18 billion in one year, after making only $4 billion? They retained $14 billion of purchased assets?
On GM’s 2003 Balance Sheet, you’ll find total stockholder equity for 2003 was $25.268bn and in 2002 it was $6.814bn.
How did GM increase its equity by $18 billion in one year, after making only $4 billion? They retained $14 billion of purchased assets?
On GM’s 2003 Balance Sheet, you’ll find total stockholder equity for 2003 was $25.268bn and in 2002 it was $6.814bn.
How did GM increase its equity by $18 billion in one year, after making only $4 billion? They retained $14 billion of purchased assets?
“How did GM increase its equity by $18 billion in one year, ….”
GM probably issued new shares on the public markets
“How did GM increase its equity by $18 billion in one year, ….”
GM probably issued new shares on the public markets
“How did GM increase its equity by $18 billion in one year, ….”
GM probably issued new shares on the public markets
I’ll be 66 this summer, and I have no problem with the idea of advancing the retirement age bit by bit. I don’t plan on retiring in the traditional sense anyway. But the current health care racket is just the dumbest ass cluster fuck I can imagine. There was more hours worth of paper work generated from my most recent doctor’s visit than the time I spent with the doc, and it had to go through the doc’s office, to MediCare, and to Blue Shield (supplemental insurance), and back to me. Totally stupid. Single payer is the only system that makes sense. I’d be willing to bet that half-way decently run national health would save billions a year over the current system just in paper work costs.
I’ll be 66 this summer, and I have no problem with the idea of advancing the retirement age bit by bit. I don’t plan on retiring in the traditional sense anyway. But the current health care racket is just the dumbest ass cluster fuck I can imagine. There was more hours worth of paper work generated from my most recent doctor’s visit than the time I spent with the doc, and it had to go through the doc’s office, to MediCare, and to Blue Shield (supplemental insurance), and back to me. Totally stupid. Single payer is the only system that makes sense. I’d be willing to bet that half-way decently run national health would save billions a year over the current system just in paper work costs.
I’ll be 66 this summer, and I have no problem with the idea of advancing the retirement age bit by bit. I don’t plan on retiring in the traditional sense anyway. But the current health care racket is just the dumbest ass cluster fuck I can imagine. There was more hours worth of paper work generated from my most recent doctor’s visit than the time I spent with the doc, and it had to go through the doc’s office, to MediCare, and to Blue Shield (supplemental insurance), and back to me. Totally stupid. Single payer is the only system that makes sense. I’d be willing to bet that half-way decently run national health would save billions a year over the current system just in paper work costs.
I’ll be 66 this summer, and I have no problem with the idea of advancing the retirement age bit by bit. I don’t plan on retiring in the traditional sense anyway. But the current health care racket is just the dumbest ass cluster fuck I can imagine. There was more hours worth of paper work generated from my most recent doctor’s visit than the time I spent with the doc, and it had to go through the doc’s office, to MediCare, and to Blue Shield (supplemental insurance), and back to me. Totally stupid. Single payer is the only system that makes sense. I’d be willing to bet that half-way decently run national health would save billions a year over the current system just in paper work costs.
I used to conduct training courses for managers of service businesses. It always appalled me how low their grasp of the basics of profitability in their own businesses were. (Correction: not their own businesses, these were all owned by a large corporation.)
I remember presenting exactly these kinds of comparisons. I used to ask them, if I can generate a 35% gross profit margin, that’s good, right? Heads bobbed. I asked, are there any qualifications to that? No other comments.
Then I’d say, but what if my annual revenue was $1,000,000, so my gross profit was $350,000, but it cost me an investment of $35 million to arrive at that point? I’m making one percent per year on my investment. Is that good?
Blank looks. They’d been trained that their target was a certain gross profit percentage, and they couldn’t see beyond that.
That was the fault of the corporation, to be honest–if you train your dog to chew shoes, expect to go barefoot–but I wonder how far the average investor, big or small, goes in analyzing financial data. Apparently not far enough.
Speaking of productivity, I had a similar exercise along that line. I presented two employee profiles. One worked hard all day, and completed a dozen service jobs every shift. The other worked about two hours a day, completed about eight service jobs in that time, and spent the rest of the day watching cartoons in the break room.
Fire him! Blasphemy! How dare he! Reward the hard workers!
Then I told them that the first employee’s rate of failure was about 25 percent, while the second employee’s work was almost always done right the first time. I walked through the numbers showing that the average length of time to complete a service to the customer’s satisfaction was actually far lower for the second employee than the first. Reaction?
Fire him! Blasphemy! How dare he!
That was all I could ever coax out of most of them. On occasion, one of them would say, “Maybe this second guy is bored. And apparently he knows some stuff that the first guy doesn’t. Maybe he could train the first…”
Blasphemy! the others shrieked. What? So they can BOTH watch cartoons? Fire him!
I had my own ideas about who should be fired. I wasn’t surprised to learn, some years later, that the corporation had gotten out of the service business altogether and sold off the service centers.
I used to conduct training courses for managers of service businesses. It always appalled me how low their grasp of the basics of profitability in their own businesses were. (Correction: not their own businesses, these were all owned by a large corporation.)
I remember presenting exactly these kinds of comparisons. I used to ask them, if I can generate a 35% gross profit margin, that’s good, right? Heads bobbed. I asked, are there any qualifications to that? No other comments.
Then I’d say, but what if my annual revenue was $1,000,000, so my gross profit was $350,000, but it cost me an investment of $35 million to arrive at that point? I’m making one percent per year on my investment. Is that good?
Blank looks. They’d been trained that their target was a certain gross profit percentage, and they couldn’t see beyond that.
That was the fault of the corporation, to be honest–if you train your dog to chew shoes, expect to go barefoot–but I wonder how far the average investor, big or small, goes in analyzing financial data. Apparently not far enough.
Speaking of productivity, I had a similar exercise along that line. I presented two employee profiles. One worked hard all day, and completed a dozen service jobs every shift. The other worked about two hours a day, completed about eight service jobs in that time, and spent the rest of the day watching cartoons in the break room.
Fire him! Blasphemy! How dare he! Reward the hard workers!
Then I told them that the first employee’s rate of failure was about 25 percent, while the second employee’s work was almost always done right the first time. I walked through the numbers showing that the average length of time to complete a service to the customer’s satisfaction was actually far lower for the second employee than the first. Reaction?
Fire him! Blasphemy! How dare he!
That was all I could ever coax out of most of them. On occasion, one of them would say, “Maybe this second guy is bored. And apparently he knows some stuff that the first guy doesn’t. Maybe he could train the first…”
Blasphemy! the others shrieked. What? So they can BOTH watch cartoons? Fire him!
I had my own ideas about who should be fired. I wasn’t surprised to learn, some years later, that the corporation had gotten out of the service business altogether and sold off the service centers.
I used to conduct training courses for managers of service businesses. It always appalled me how low their grasp of the basics of profitability in their own businesses were. (Correction: not their own businesses, these were all owned by a large corporation.)
I remember presenting exactly these kinds of comparisons. I used to ask them, if I can generate a 35% gross profit margin, that’s good, right? Heads bobbed. I asked, are there any qualifications to that? No other comments.
Then I’d say, but what if my annual revenue was $1,000,000, so my gross profit was $350,000, but it cost me an investment of $35 million to arrive at that point? I’m making one percent per year on my investment. Is that good?
Blank looks. They’d been trained that their target was a certain gross profit percentage, and they couldn’t see beyond that.
That was the fault of the corporation, to be honest–if you train your dog to chew shoes, expect to go barefoot–but I wonder how far the average investor, big or small, goes in analyzing financial data. Apparently not far enough.
Speaking of productivity, I had a similar exercise along that line. I presented two employee profiles. One worked hard all day, and completed a dozen service jobs every shift. The other worked about two hours a day, completed about eight service jobs in that time, and spent the rest of the day watching cartoons in the break room.
Fire him! Blasphemy! How dare he! Reward the hard workers!
Then I told them that the first employee’s rate of failure was about 25 percent, while the second employee’s work was almost always done right the first time. I walked through the numbers showing that the average length of time to complete a service to the customer’s satisfaction was actually far lower for the second employee than the first. Reaction?
Fire him! Blasphemy! How dare he!
That was all I could ever coax out of most of them. On occasion, one of them would say, “Maybe this second guy is bored. And apparently he knows some stuff that the first guy doesn’t. Maybe he could train the first…”
Blasphemy! the others shrieked. What? So they can BOTH watch cartoons? Fire him!
I had my own ideas about who should be fired. I wasn’t surprised to learn, some years later, that the corporation had gotten out of the service business altogether and sold off the service centers.
I am not in disagreement with the basic premise of this argument, but the examples cited are not terribly useful. ROE and ROA calculations work most effectively in situations where there is insignificant change from one year to the next. Another thing to consider, especially concerning ROA, is the type of business you are looking at. A heavy manufacturing company, and especially an automobile company, is going to have a much lower ROA than the market average, considering the amount of fixed assets the business needs to produce revenue. Comparing such measures over extended periods of time also introduces a lot of noise. Changes in accounting principles, the well-observed shift of our economy from manufacturing to services, and overall economic conditions have as much of an effect on these measures as how actual businesses are doing. There is much more subtlety to these measures than the simple profit margin calculations. There is a lot of influence from factors outside of the actual operations of the business. That is a good reason why workers are not expected to think in such terms.
I am not in disagreement with the basic premise of this argument, but the examples cited are not terribly useful. ROE and ROA calculations work most effectively in situations where there is insignificant change from one year to the next. Another thing to consider, especially concerning ROA, is the type of business you are looking at. A heavy manufacturing company, and especially an automobile company, is going to have a much lower ROA than the market average, considering the amount of fixed assets the business needs to produce revenue. Comparing such measures over extended periods of time also introduces a lot of noise. Changes in accounting principles, the well-observed shift of our economy from manufacturing to services, and overall economic conditions have as much of an effect on these measures as how actual businesses are doing. There is much more subtlety to these measures than the simple profit margin calculations. There is a lot of influence from factors outside of the actual operations of the business. That is a good reason why workers are not expected to think in such terms.
I am not in disagreement with the basic premise of this argument, but the examples cited are not terribly useful. ROE and ROA calculations work most effectively in situations where there is insignificant change from one year to the next. Another thing to consider, especially concerning ROA, is the type of business you are looking at. A heavy manufacturing company, and especially an automobile company, is going to have a much lower ROA than the market average, considering the amount of fixed assets the business needs to produce revenue. Comparing such measures over extended periods of time also introduces a lot of noise. Changes in accounting principles, the well-observed shift of our economy from manufacturing to services, and overall economic conditions have as much of an effect on these measures as how actual businesses are doing. There is much more subtlety to these measures than the simple profit margin calculations. There is a lot of influence from factors outside of the actual operations of the business. That is a good reason why workers are not expected to think in such terms.
We grew securitized debt by $10 trillion from 2004 – 2008, and only grew the economy GDP by slightly over $3 trillion! This completes the second consecutive boom bust bubble cycle in our economy without any tangible sustainable growth! Neither cycle left much to pick up and move forward with. Meredith Whitney’s comments from her participation on a FDIC panel in the spring of 2006 makes a great analogy, whereas she identifies the segment of our population that was extended unearned credit by identifying the long term breakdown from 1970 – 1994! She found that during this 24 year period, 26% of the population live at or below the poverty line, no access to credit, while 64% consistently owned a home, deemed good credit quality! The remaining 10% are the ones who were “given” credit, and thus helped create the vacuum of securitized debt we live in today!
We grew securitized debt by $10 trillion from 2004 – 2008, and only grew the economy GDP by slightly over $3 trillion! This completes the second consecutive boom bust bubble cycle in our economy without any tangible sustainable growth! Neither cycle left much to pick up and move forward with. Meredith Whitney’s comments from her participation on a FDIC panel in the spring of 2006 makes a great analogy, whereas she identifies the segment of our population that was extended unearned credit by identifying the long term breakdown from 1970 – 1994! She found that during this 24 year period, 26% of the population live at or below the poverty line, no access to credit, while 64% consistently owned a home, deemed good credit quality! The remaining 10% are the ones who were “given” credit, and thus helped create the vacuum of securitized debt we live in today!
Anyone else notice that this all began after Dan rather was forced out of office? Coincidence? I think not.
Anyone else notice that this all began after Dan rather was forced out of office? Coincidence? I think not.
Anyone else notice that this all began after Dan rather was forced out of office? Coincidence? I think not.
Anyone else notice that this all began after Dan rather was forced out of office? Coincidence? I think not.
Large corporate exec types have been overcome by greed. They want to pay workers nothing, keep all the profits, and pay no taxes. Marie Antoinette got that wish, but I don’t think she was happy with it. If these folks don’t break their addiction to greed, they may follow in her footsteps!
Large corporate exec types have been overcome by greed. They want to pay workers nothing, keep all the profits, and pay no taxes. Marie Antoinette got that wish, but I don’t think she was happy with it. If these folks don’t break their addiction to greed, they may follow in her footsteps!
This is like living through “Atlas Shrugged”, except that the only people demonstrably improving our lives are involved in civil engineering projects (or something similar). Bridges, roads, dams, etc.
I’ve known that Ford, Chrysler, and GM have held Michigan hostage for years. I had hoped that my suspicions of Wall Street were fueled by envy – but if anything, despite living in Michigan and seeing what Big Corporate Culture does, it was far worse than I imagined.
Argh. I’m blathering now. Call me a Troll.
This is like living through “Atlas Shrugged”, except that the only people demonstrably improving our lives are involved in civil engineering projects (or something similar). Bridges, roads, dams, etc.
I’ve known that Ford, Chrysler, and GM have held Michigan hostage for years. I had hoped that my suspicions of Wall Street were fueled by envy – but if anything, despite living in Michigan and seeing what Big Corporate Culture does, it was far worse than I imagined.
Argh. I’m blathering now. Call me a Troll.
Yeah, Atlas shrugged and we got mugged…
Yeah, Atlas shrugged and we got mugged…
Yeah, Atlas shrugged and we got mugged…
Regarding ROA versus ROE, there is something else to think about. Think about what ROA really is. ROA is whatever the accepted book value is on things the company owns, like land, factories, office buldings.
A caveat to the article is that the real story with ROA is probably that it is pumped up baloney. The reason to pump it up is simple, that’s what you need to do to get loans. But, what is the value of a factory that isn’t producing? Answer – less than zero.
It costs money to hold onto a shutdown factory, and it usually has to be razed eventually. What is the value of the land? That depends. In the real world it can often be close to zero or below it.
So I am fairly sure that the picture is actually worse than suggested. It is very doubtful that GM’s assets are actually that valuable. Absent a detailed analysis, as a rule of thumb cut their supposed value by 5 to 10 times to get what they are really worth.
Regarding ROA versus ROE, there is something else to think about. Think about what ROA really is. ROA is whatever the accepted book value is on things the company owns, like land, factories, office buldings.
A caveat to the article is that the real story with ROA is probably that it is pumped up baloney. The reason to pump it up is simple, that’s what you need to do to get loans. But, what is the value of a factory that isn’t producing? Answer – less than zero.
It costs money to hold onto a shutdown factory, and it usually has to be razed eventually. What is the value of the land? That depends. In the real world it can often be close to zero or below it.
So I am fairly sure that the picture is actually worse than suggested. It is very doubtful that GM’s assets are actually that valuable. Absent a detailed analysis, as a rule of thumb cut their supposed value by 5 to 10 times to get what they are really worth.
Regarding ROA versus ROE, there is something else to think about. Think about what ROA really is. ROA is whatever the accepted book value is on things the company owns, like land, factories, office buldings.
A caveat to the article is that the real story with ROA is probably that it is pumped up baloney. The reason to pump it up is simple, that’s what you need to do to get loans. But, what is the value of a factory that isn’t producing? Answer – less than zero.
It costs money to hold onto a shutdown factory, and it usually has to be razed eventually. What is the value of the land? That depends. In the real world it can often be close to zero or below it.
So I am fairly sure that the picture is actually worse than suggested. It is very doubtful that GM’s assets are actually that valuable. Absent a detailed analysis, as a rule of thumb cut their supposed value by 5 to 10 times to get what they are really worth.
Regarding ROA versus ROE, there is something else to think about. Think about what ROA really is. ROA is whatever the accepted book value is on things the company owns, like land, factories, office buldings.
A caveat to the article is that the real story with ROA is probably that it is pumped up baloney. The reason to pump it up is simple, that’s what you need to do to get loans. But, what is the value of a factory that isn’t producing? Answer – less than zero.
It costs money to hold onto a shutdown factory, and it usually has to be razed eventually. What is the value of the land? That depends. In the real world it can often be close to zero or below it.
So I am fairly sure that the picture is actually worse than suggested. It is very doubtful that GM’s assets are actually that valuable. Absent a detailed analysis, as a rule of thumb cut their supposed value by 5 to 10 times to get what they are really worth.
You are mugged by committees of men in suits who have their willing minion to perpetrate daily atrocities while the overseers come with open hands for bribes.
You are mugged by committees of men in suits who have their willing minion to perpetrate daily atrocities while the overseers come with open hands for bribes.
You are mugged by committees of men in suits who have their willing minion to perpetrate daily atrocities while the overseers come with open hands for bribes.
You are mugged by committees of men in suits who have their willing minion to perpetrate daily atrocities while the overseers come with open hands for bribes.
Still, this is the wrong calculation. The number traders look at is neither ROE or ROA but P/E. The “shareholder’s equity” in the ROE calculation is fairly nonsensical anyway – just a bookkeeping device really. And while the assets are fairly better measured, it includes all sorts of things (especially in the case of GM) that could have been bought over a long time.
What everyone wants to know is “if I buy a share of GM stock at price P, how much earnings E am I going to get?” By that measure, the market isn’t that different from the 1960s
Still, this is the wrong calculation. The number traders look at is neither ROE or ROA but P/E. The “shareholder’s equity” in the ROE calculation is fairly nonsensical anyway – just a bookkeeping device really. And while the assets are fairly better measured, it includes all sorts of things (especially in the case of GM) that could have been bought over a long time.
What everyone wants to know is “if I buy a share of GM stock at price P, how much earnings E am I going to get?” By that measure, the market isn’t that different from the 1960s
Still, this is the wrong calculation. The number traders look at is neither ROE or ROA but P/E. The “shareholder’s equity” in the ROE calculation is fairly nonsensical anyway – just a bookkeeping device really. And while the assets are fairly better measured, it includes all sorts of things (especially in the case of GM) that could have been bought over a long time.
What everyone wants to know is “if I buy a share of GM stock at price P, how much earnings E am I going to get?” By that measure, the market isn’t that different from the 1960s
Still, this is the wrong calculation. The number traders look at is neither ROE or ROA but P/E. The “shareholder’s equity” in the ROE calculation is fairly nonsensical anyway – just a bookkeeping device really. And while the assets are fairly better measured, it includes all sorts of things (especially in the case of GM) that could have been bought over a long time.
What everyone wants to know is “if I buy a share of GM stock at price P, how much earnings E am I going to get?” By that measure, the market isn’t that different from the 1960s
Here’s my question:
Where the hell are GM’s $448.507bn in assets?
Seriously, what do they own worth all that? And why the hell isn’t it being fire sold? That number is off by a factor of 10. It has to be.
Here’s my question:
Where the hell are GM’s $448.507bn in assets?
Seriously, what do they own worth all that? And why the hell isn’t it being fire sold? That number is off by a factor of 10. It has to be.
Here’s my question:
Where the hell are GM’s $448.507bn in assets?
Seriously, what do they own worth all that? And why the hell isn’t it being fire sold? That number is off by a factor of 10. It has to be.
Here’s my question:
Where the hell are GM’s $448.507bn in assets?
Seriously, what do they own worth all that? And why the hell isn’t it being fire sold? That number is off by a factor of 10. It has to be.
Every Governor should be yanking all of its charters in order to determine who is a shell and who isn’t, in order to know whether business exists in the state, or whether like the derivative business that became the bail out, it’s all a corporate shell game.
How can any Governor make decisions without that knowledge?
Every Governor should be yanking all of its charters in order to determine who is a shell and who isn’t, in order to know whether business exists in the state, or whether like the derivative business that became the bail out, it’s all a corporate shell game.
How can any Governor make decisions without that knowledge?
Every Governor should be yanking all of its charters in order to determine who is a shell and who isn’t, in order to know whether business exists in the state, or whether like the derivative business that became the bail out, it’s all a corporate shell game.
How can any Governor make decisions without that knowledge?