Global Business Simulation Game
A question I sometimes hear from people is why some companies are able to get outrageous RoE. Up to 99.9%. Unlike what people think, having a high RoE is actually a product of a bad past, in the great sense of it all.
Return on Equity is net profit/ Shareholder’s equity. And whatever your net profit is, your shareholder’s equity will increase with subsequent years, therefore by the end game, it is very difficult to have a high RoE, because you have so much stockpiled equity. In fact a successful company has trouble keeping up their RoE.
But what happens if a company had difficult years? To the point they had a negative equity, due to big losses in several years?
For example, a succesful company with $30k net profit and an accumulated $200k in equity would have a 15% RoE.
But a company that had a $10k net profit, but their accumulated equity was only $1k ($1000) because they were in the negative for years and just rought their RoE back up. The RoE would start hitting that 99.9%.
Just something to note.. while high RoE is amazing.. it’s usual background is a checkered past. Any company that is doing decent, won’t realistically have RoE higher than 50%, and most likely will not sustain it.