Recognise the business is more successful?
Coca-Cola (KO) having a Return on Equity of 46% or
Merrill Lynch (MER) having a Return on Equity of 18%
The answer is Merrill Lynch by any measure. But Coca-Cola includes a higher ROE. How is that this possible?
Return on equity is calculated by dividing a company�s net gain by stockholder�s equity. Coca-Cola is so over valued that its stockholder�s equity is just comparable to about 5% from the total market value from the company. The stockholder equity is so small that nearly any amount of net income will create a favorable ROE.
Merrill Lynch on the other hand, has stockholder�s equity equal to 42% from the market value of the company and requires a greater net gain figure to produce a comparable ROE. My point is the fact that ROE doesn't compare apples to apples so therefore isn't a good relative indicator in comparing company performance.