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Bulkowski's Return on Shareholders' Equity

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As of 11/13/2019
  Indus: 27,784 +92.10 +0.3%  
  Trans: 10,843 -116.63 -1.1%  
  Utils: 844 +12.11 +1.5%  
  Nasdaq: 8,482 -3.99 0.0%  
  S&P 500: 3,094 +2.20 +0.1%  
YTD
 +19.1%  
 +18.2%  
 +18.4%  
 +27.8%  
 +23.4%  
  Targets    Overview: 10/31/2019  
  Up arrow28,200 or 27,100 by 12/01/2019
  Up arrow11,300 or 10,100 by 11/15/2019
  Up arrow870 or 800 by 12/01/2019
  Up arrow8,700 or 8,200 by 12/01/2019
  Up arrow3,150 or 2,950 by 11/15/2019
As of 11/13/2019
  Indus: 27,784 +92.10 +0.3%  
  Trans: 10,843 -116.63 -1.1%  
  Utils: 844 +12.11 +1.5%  
  Nasdaq: 8,482 -3.99 0.0%  
  S&P 500: 3,094 +2.20 +0.1%  
YTD
 +19.1%  
 +18.2%  
 +18.4%  
 +27.8%  
 +23.4%  
  Targets    Overview: 10/31/2019  
  Up arrow28,200 or 27,100 by 12/01/2019
  Up arrow11,300 or 10,100 by 11/15/2019
  Up arrow870 or 800 by 12/01/2019
  Up arrow8,700 or 8,200 by 12/01/2019
  Up arrow3,150 or 2,950 by 11/15/2019

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

Mt book, Fundamental Analysis and Position TradingFundamental Analysis and Position Trading: Evolution of a Trader book., pictured on the other right, discusses fundamental analysis including such factors as book value, P/E ratio, debt, and return on shareholders' equity.

If you click on this link and then buy the book (or anything) at Amazon.com, the referral will help support this site. Thanks. -- Tom Bulkowski

$ $ $

This page reviews the result from a study of return on shareholders' equity.

Return on Shareholders' Equity Summary

Value Line defines the return on shareholders' equity as "annual net profit divided by year-end shareholders' equity," where shareholders' equity is "a balance sheet item showing a company's net worth. Represents the sum of common and preferred equity including redeemable preferred. Also includes intangibles." What are intangibles? "Assets such as goodwill (the excess of cost over net assets of companies acquired by purchase), patents, trademarks, unamortized debt discounts, and deferred charges." Clear as mud. I think of shareholders' equity as the net worth of the company and leave it at that.

A study of the return on shareholders' equity shows the measure has little benefit to picking stocks that outperform. A low return on shareholders' equity works better than a high return 49% of the time. That is random. However, the measure seems to add benefit during and after a bear market, but additional samples may change that assessment.

Other fundamental analysis ratios predict better performance.

Return on Shareholders' Equity Methodology

I used the Value Line investment survey and typed in their return on shareholders' equity percentages to build a database of 178 stocks with data ranging from 12/30/1991 to 7/11/2008.

After completing the database, I logged the close-to-close price change from 1 to 5 years out, looking forward from the base year. The base year ranged from 1992 to 2006. Not all stocks covered the entire range. Years with no numbers were excluded. The price change measured from the close on the last trading day of each year. Years 2008 and later are not included since the year had not completed as of the time of this study.

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Return on Shareholders' Equity Results

The following table shows the results of return on shareholders' equity (ROSE) versus performance over time.

Base YearROSEMedian ROSE1 year2 years3 years4 years5 yearsSamples
1998High15.95%23.0%18.6%13.8%6.5%11.7%61
Low18.7%7.0%5.9%2.0%11.0%61
1999High15.25%1.9%8.1%0.2%8.3%11.4%64
Low-9.9%-8.4%-9.0%0.0%5.7%64
2000High15.45%7.6%-2.5%8.1%11.6%11.1%66
Low-3.2%-6.7%6.7%13.4%18.3%66
2001High13.2%-13.2%6.1%10.5%11.8%12.8%65
Low-8.6%13.5%22.2%22.9%24.5%67
2002High12.2%28.5%24.2%19.7%20.9%13.5%66
Low40.3%43.1%41.7%38.4%37.5%68
2003High12.45%17.6%14.3%14.3%11.2%70
Low28.3%25.0%25.3%21.7%70
2004High13.8%19.9%17.7%15.6%77
Low16.8%16.9%14.6%78
2005High15.5%10.6%12.8%81
Low19.8%10.2%82
2006High16.45%12.6%82
Low2.0%82

Let's take an example using 2006. Stocks with a return on shareholders' equity above the median 16.45% had gains averaging 12.6% in 2007 compared to gains of 2.0% for stocks with return on shareholders' equity at or below the median. No more results appear for that row because the years had not ended when the study was done. There were 82 samples that qualified for the study.

Notice that the bear market years of 2001 to 2003 have the low return on shareholders' equity showing future outperformance when compared to the high return measure. If you add up the winners and losers of the 35 test periods, you will find that the low return on shareholders' equity beats the high return category 49% of the time. I consider that random, although the bear market years tend to show above average results, perhaps due to low sample counts.

I consider these results preliminary since I intend to expand the database and then publish my findings.

-- Thomas Bulkowski

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See Also

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. Q: What makes men chase women they have no intention of marrying? A: The same urge take makes dogs chase cars they have no intention of driving.