Saturday, January 26, 2013

Say What? Assets v Equity Again

Can this be right?
[Morgan Stanley]  managed to produce a return on shareholder equity of only 5 percent for the year, compared to 10.7 percent at its rival Goldman Sachs. Simply to cover its debt expenses and other capital costs, Morgan Stanley needs to achieve a return on equity closer to 10 percent. 
Link  Seems to me she must mean return on assets, not so?  Debt expense determines return on equity, yes, not the other way around?   You might count as a slip of the pen, except she says "return on shareholder equity" in the previous sentence as well.  You might write it off as a rookie error but her personal blurb suggests she has been in and around finance for 15 years.   As it stands, it's the kind of mistake my students make all the time but they are, you know, beginners.

2 comments:

Anonymous said...

Actually she does mean "return on equity." A 5 or 10% ROA for an investment bank would be unheard-of; for MS it would mean $76bn in net income as opposed to their actual negative net income. (Note of course that they didn't have a 5% ROE either; they had a 5% ROE-excluding-some-stuff. See here.)

She does not, of course, mean "Simply to cover its debt expenses and other capital costs, Morgan Stanley needs to achieve a return on equity closer to 10 percent." She means "it is a trope among business journalists that i-bank ROEs have to be above 10% to cover a thing called the 'cost of equity capital,' which journalists take strangely seriously."

Rarely is it expressed this badly though. She is one of the Times's most experienced financial business journalists.

Buce said...

Thanks, most instructive. I award the decision on points to myself.