Does ROE project future returns?


ROE is not your return as an investor - that is what you are missing.

To work out your return as an investor you need to add your capital growth to your income from the stocks.

To work out your capital growth you work out the percentage increase or decrease in share price from year to year. To work out your income you divide the dividend amount each year by the price you bought the stock at. You then add the two together and that will be your total annual return as an investor.


The "equity" in return on equity (ROE) is based on book value -- an accounting construct that does not represent the economic or market value of the company. You do not have the opportunity to invest or reinvest in Apple at book value. Based on the current price-to-book ratio, you have to pay 9.3 times book value. This means the market has already recognized that Apple's profitability justifies a market cap far above its book value. So your investment returns will be far less than the ROE.


1.3^20 = 190. Apple's current market cap is $1T today. $190T is a bit more than Total US wealth, just passing $100T.

Even adjusting for inflation won't work.

edit, to respond to OP’s comment. Instead of looking at Apple’s share price, I observe that the market cap, the total value of all shares, is over $1T, a trillion dollars. You ask, I believe, if the 30% growth can continue, long term. Simple math of 30%/yr, multiplying by 1.3 20 times, turns $1T in value to $190T. My answer is no, as the current total US wealth is just $100T. Not looking to debate projected US wealth, but even if we assume $400T, it would be difficult to imagine one company having such value, in comparison.

There is a concept called the law of large numbers, and it suggests that growth has to level out at some point. Consider, cell phones were introduced and had a remarkable growth curve. Could phone sales grow faster than world population forever? Even if every human had a phone and bought a new one every year, the ceiling is 7B units/yr.