John Abernethy, CIO, Clime Asset Management explains the financial ratios he will focus on most this reporting season

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John Abernethy, CIO, Clime Asset Management explains the financial ratios he will focus on most this reporting season. Return on equity generally and specifically the incremental return on retained earnings. There is no better financial ratio or measure to determine whether the value of company can or should rise. The generation of profit and the decision to distribute or retain are critical capital decisions that drive or detract from company value. Remarkably there are insufficient general analyses of this metric with many analysts defaulting to EPS growth. However, EPS growth can be created with debt or through merely deploying net cash. A company that can sustainably reinvest operating cash flow profits at high rates of return is always superior to a company that acquires earnings.


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