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What are the downsides of using return on equity as a KPI for our investors?
Private company with some new investors looking for concise quarterly snapshot of business health.
Answers
Key considerations when using ROE as a measure of company performance include non-cash expenses and debt levels. Non-cash items such as write-downs impact ROE positively despite the fact that there was not an actual change in cash invested in or generated by the business. Differences in debt levels make it difficult to use ROE (without adjustments) as a comparison tool for how you are performing against the competition - companies that obtain most of their capital through debt financing may have superior ROE to primarily equity funded businesses without any real performance difference.