on measuring value created

John Cassidy pulls out a napkin and sketches some thoughtful comparisons of Apple and Goldman – and ostensibly on doing God’s work

…During the past couple of years, the banks, Goldman included, have cut their leverage ratios sharply, partly by issuing more equity to shareholders, partly by selling assets and paying down debts. As a result, we now have a more realistic estimate of their earnings power. Despite its return to profitability in 2009 and 2010, Goldman’s ROE last year was just 11.5 per cent. Apple, by contrast, generated a ROE of about thirty-two per cent in 2010, almost three times the Goldman figure.

Another way to gauge a firm’s performance is to take everything it possesses—its buildings, its machinery and other equipment, its product designs, and its financial holdings—and look at how much profit it generates for each dollar of assets on its books. In my opinion, this measure, which is known as return on assets (ROA), is the best way to judge a business, because it excludes the amplifying effect of leverage. Now let’s apply it to Goldman and Apple.

According to its latest filing with the S.E.C., Goldman ended 2010 with assets of $911 billion, which means its ROA for the year was roughly .91 per cent. (Yes, that is less than one per cent.) Apple ended 2010 with total assets of $86.7 billion, which means it generated an ROA of about 20.3 per cent.

To summarize: Apple isn’t merely generating a higher return on the capital it employs than Goldman; it is more than twenty times as profitable! How can this be?

via Rational Irrationality: Goldman Vs. Apple: Who Generates the Highest Economic Return? : The New Yorker.

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