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  • Esthetic Group Project Presentation 20231121 083949 0000

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    Hannah Agravante
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    ROE shows the rate of profit earned by stockholders. An ROE of 10-15% is generally sufficient to compensate investors for risk, while consistently below that is insufficient. High profit rates come from high margins, asset turnover, and leverage. In perfectly competitive markets, profits tend to be low and reflect only a normal rate of return due to price equaling average cost. Over time, entry and growth cause above-normal profits to regress to the mean, while exit allows below-normal profits to rise to the mean. In the long run, the typical competitive firm can expect only a normal rate of return as luck cannot provide durable above-average returns.

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    ROE shows the rate of profit earned by stockholders. An ROE of 10-15% is generally sufficient to compensate investors for risk, while consistently below that is insufficient. High profit rates come from high margins, asset turnover, and leverage. In perfectly competitive markets, profits tend to be low and reflect only a normal rate of return due to price equaling average cost. Over time, entry and growth cause above-normal profits to regress to the mean, while exit allows below-normal profits to rise to the mean. In the long run, the typical competitive firm can expect only a normal rate of return as luck cannot provide durable above-average returns.

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    12 views12 pages

    Esthetic Group Project Presentation 20231121 083949 0000

    Uploaded by

    Hannah Agravante
    ROE shows the rate of profit earned by stockholders. An ROE of 10-15% is generally sufficient to compensate investors for risk, while consistently below that is insufficient. High profit rates come from high margins, asset turnover, and leverage. In perfectly competitive markets, profits tend to be low and reflect only a normal rate of return due to price equaling average cost. Over time, entry and growth cause above-normal profits to regress to the mean, while exit allows below-normal profits to rise to the mean. In the long run, the typical competitive firm can expect only a normal rate of return as luck cannot provide durable above-average returns.

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    of 12

    WONDERFUL BUSINESS

    RETURN ON EQUITY
    ROE is an attractive measure of firm performance because it
    shows the rate of profit earned on funds committed to the
    enterprise by its owners, the stockholders. When ROE is at or
    above 10 percent to 15 percent per year, the rate of profit is
    generally sufficient to compensate investors for the risk
    involved with a typical business enterprise. When ROE
    consistently falls far below 10 percent to 15 percent per year,
    profit rates are generally insufficient to compensate investors
    for the risks undertaken.
    MARKET STRUCTURE AND
    PROFIT RATES
    High business profit rates are derived from
    some combination of high profit margins,
    quick total asset turnover, and high
    leverage.
    Profit Rates in Competitive
    Markets
    This stems from the fact that in
    a perfectly competitive market, theory suggests that
    P=MC and MC=AC As a result, when average cost
    includes a risk-adjusted normal rate of return on
    investment, P=AC.
    This means that when profit margin is measured as
    (P- AC)/P,vprofit margins will tend to be low and reflect
    only a normal rate of return in competitive markets.
    Mean Reversion in Profit
    Rates
    Over time, entry and nonleading firm growth in
    highly profitable competitive markets
    cause above-normal profits to regress toward
    the mean. Conversely, bankruptcy and
    exit allow the below-normal profits of
    depressed competitive markets to rise toward
    the mean.
    COMPETITIVE MARKET
    STRATEGY
    In perfectly competitive markets,
    innovation and imitation by rivals
    makes ongoing survival a constant
    struggle.
    Short-Run Firm Performance
    In the short run, above-normal profits in perfectly competitive
    industries are sometimes simply disequilibrium profits.
    Disequilibrium profits are above normal returns earned in the
    time interval that exists between when a favorable influence on
    industry demand or cost conditions first transpires and the time
    when competitor entry or growth finally develops.
    Disequilibrium losses are below-normal returns suffered in the
    time interval between when unfavorable influence industry
    demand or cost condition first tranpires and the time when exit
    or driwnsizing finally occurs.
    Long-Run Firm Performance
    In long-run equilibrium, the typical firm in a perfectly
    competitive market has the
    potential for only a normal rate of return on
    investment. If many capable competitors
    offer identical products, vigorous price competition
    tends to eliminate disequilibrium
    profits. In the long run, good and bad fortune tends
    to average out. Luck cannot be relied
    upon as a source of durable above-average rates of
    return

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