Hi Yasar,

It is possible for any company to generate ROE less than COE despite having positive earnings. COE is nothing but the opportunity cost of capital for equity holders to take that amount of risk to invest in this company.

Hence if a company is generating less ROE than COE than it is not beneficial for equity holders as they can rather invest their money at some other place (Opportunity cost of capital).

Priyank Jain

follow up question-

I found AXP, BAC, JPM, C, GS are all showing this behavior. However, these all stocks are continously going up. Further, BAC, GS, AXP are owned by Warren Buffet and if he sees his value being destroyed he might have sold these stocks. Not sure I am doing something wrong or need to adjust the beta of these stocks. I know this question is not straight forward and tricky but let me know if you get some idea.

Hi Yasar,

No Its not tricky however you need to understand the concepts ina little more detail. When you look at the price appreciation of a stock then you need to the capital market expectation. What people (Investors) are expecting from the stock.

Bank of America, Citi Group etc trades at Price to Book value of less than 1. One of the reason they are trading at a discount to the book value is that because they are expected to erode shareholder's value (Other possible reasons could be the inflated book value). The reason people (Like Buffet) are invested in these stock is low valuation. These investors might be expecting that, in the long run, company would start giving more return than the COE because phenomenal past track record and able management.


Priyank Jain


PS: I would appreciate if you could write the complete name of the company than just writing ticker

This answer is pretty good. In future I would use company's name instead of symbol. Thank you.