Investment Banking For Dummies

Chapter 14

Determining the Strength of a Company's Return on Equity

In This Chapter

Understanding the importance of return on equity

Seeing how return on equity can guide investment banking activities

Finding out how to perform a DuPont analysis

Interpreting the results of a DuPont analysis

How do investment bankers, investors, and management judge how well a company is performing? For most publicly traded companies, the obvious answer would be how well the stock is doing. The bottom-line test of performance is often whether the value of the stock has risen or fallen in recent times and how the stock has performed relative to other publicly traded stocks in the company's industry or the broad stock market. But how should we judge the performance of privately held companies? What metrics do investment bankers look for when evaluating private companies and determining the feasibility of bringing such companies public via an initial public offering?

Investment bankers look to the numbers to see how a firm is performing relative to itself over time (in terms of a trend analysis) and ...