THE RETURN ON EQUITY (ROE) FOR FOOD SECTOR COMPANIES
LISTED ON THE WARSAW STOCK EXCHANGE
dr hab. Sławomir Juszczyk, Warsaw University of Life Sciences (SGGW), Poland
slawomir_juszczyk@sggw.pl
mgr Artur Jan Nagórka, Warsaw University of Life Sciences (SGGW), Poland
artur_nagorka@sggw.pl
ABSTRACT
The key systematic issue tested throughout this paper is finding the reason for the relative
low representation of the food sector on the stock exchange. Research on the performance of
food sector companies within 1998–2008 led authors to the conclusion that one of the
potential reasons of such under representation might be low level of ROE relative to the
return from available investment opportunities made at the market free risk rate during the
matching period.
Polish investors enjoy a large scope of investment options, some relatively safe and capital
market risk free, including a number of Treasury Bills and Treasury Bonds.
Key thesis in this paper show substantial discrepancy between the level of return (ROE) on
Polish listed food sector companies and the level of return acceptable for investors. For the
purpose of the research the authors used several available ways to calculate ROE and
compared in this paper to the market risk free rates for the period.
Results clearly confirm that ROE of food sector companies remains on lower levels than the
market risk free rates, sometimes even remaining on negative territories.
Keywords: Return on Equity ROE, stock exchange, food sector, market risk free,
INTRODUCTION
The problem of the financial result worked out basing on assets used by the company is
present in the practice of corporate finances since the 30's of the XX century, when the
pioneer works were conducted in the financial division of the chemical giant Du Pont. The
general practice of comparing appropriate elements from companies’ financial statements and
on these basis calculating appropriate measurements of the companies’ performance thus has
taken the name of Du Pont system. While describing the issue, authors use sometimes
different taxonomy: „Du Pont system” (Ross, Westerfield, Jaffe, 1990, p.42 – 44), (Bodie,
Kane, Marcus, 2009, p. 636 – 641), (Brealey, Myers, Marcus, 2001, p. 142 – 146), „Du Pont
model” (Brigham, Daves, 2007, p. 259 – 270), „Du Pont equation” (Brigham, Ehrhardt, 2008,
p. 132 – 141), while "Du Pont pyramid" is generally used term in Polish language literature.
Within the Du Pont system there are three ratios related to defining return: ROS - Return On
Sales, ROA - Return On Assets, and ROE - Return On Equity. The most important for the
company’s owners is the third ratio which shows how efficiently equity (what in reality is the
owners own capital invested in the company) has been used by the company. There are
several approaches to which level of the result of the company’s business shall be used for
the most relevant calculation of the return shall be measured (i.e. what to use as a numerator).
It is sure that it should be one of the forms of earnings or profit but the concepts vary starting
from the level of net profit to the level of EBIT. In the case of ROE the majority agrees that
the numerator should consist of the net profit what in general practice is equal with net profit
payable to the owners. However there is a view (Garrison, Noreen, Brewer, 2008, p. 724 –
727) that the numerator should be clearly calculated as net profit corrected by the payment of
preferred dividends. This is largely unimportant for the concept of ROE and secondly the
voice is an isolated one.
As far as denominator is concerned it is crucial to use a correct figure for equity. The first
concept is that it should be the level of equity as stated for the last day of the accounting
period. This view was largely present at the initial stages of the development of the concept
of ROE (Bień, 2008, p. 99 - 103), (Micherda, red., 2005, p. 63 - 66), (Pastusiak, 2009, p. 99 101), (Sierpińska, Jachna, 1996, p. 103 - 107), (Siudek, 2004, p. 185 - 187), (Wędzki, 2003,
p. 20 - 23), (Bodie, Merton, 2003, p. 121 - 130), (Brigham, Houston, 2005, p. 119 - 122),
(Adair, 2006, p. 46 - 47), (Bodie, Kane, Marcus, 2009, p. 636 - 641), (Brigham, Daves, 2007,
p. 259 - 270), (Brigham, Ehrhardt, 2008, p. 132 - 141), (Damodaran, 1996, p. 79 - 86).
Alternatively, it is acceptable to argue that the applicable correct figure for the equity shall be
calculated as the simple average of the two consecutive accounting periods, the current and
the previous one. This point of view becomes more and more generally recognised since it is
acknowledged that the average for the year (the beginning and the end of the accounting
period figures) describes the condition of the company more precisely that the fixed figure of
the year end (Brealey, Myers, 1999, p. 1083 - 1087), (Bodie, Merton, Cleeton, 2009, p. 83 88), (Brealey, Myers, 1991, p. 680 - 682), (Brealey, Myers, 2003, p. 828 - 831), (Brealey,
Myers, Marcus, 2001, p. 142 - 146), (Garrison, Noreen, Brewer, 2008, p. 724 - 727),
(Harrington, Wilson, 1989, p. 8 - 16), (Ross, Westerfield, Jaffe, 1990, p. 42 - 44).
USAGE OF ROE
In short and simplified summary, the ROE ratio shows the company’s ability to generate
profits through the period using available means, i.e. the equity. In practice there may be
some difficulties in using ROE as a comparison tool to judge the performance of the
company – mainly because of the weakness of the net profit parameter which is the
accountancy figure versus the real money worked out by the company as shown in the cash
flow. Thus net profit is rather more a paper figure than real money in the company's disposal.
Because of different law systems and various numerous tax exemptions plus different
manners to count depreciation and amortization it is difficult to use ROE ratio as a simple
comparison between the companies. It is similarly difficult to use ROE to compare
companies from different sectors which have different capital needs.
ROE in % in various sectors in 2007:
Cigarette Industry
35,0
Iron/Steel making
26.7
Soft Drinks
19,2
Banks
17,1
Data storage
16,5
Farm products
16,5
Software for business
12,8
Telecommunication
12,3
Food
11,8
Airlines
8,5
Source: Bodie, Kane, Marcus, 2009, p. 568, from Yahoo! Finance of 5.11.2007
There are other issues that influence usage of ROE (Brigham, Houston, 2005, p. 135) related
to business risk, scale of activity and project implementing. Because of its construction, ROE
ignores the risk factor. It is possible that a very risky project, that in one accounting period
was very successful, in the next period is much worse. In this respect, judging through the
past, it would have been better to choose the project with inferior ROE but with a
significantly higher risk that would enable generating profit in the long run.
The ROE ratio does not take into account the scale of the project. There are various cases
where the high level of ROE is possible to achieve only when investing in projects of lower
scale (i.e. not using whole available capital). Managers in such circumstances should rather
decide to take on the project of lower ROE but allowing the usage of larger amount of capital.
ROE is as well difficult to use when it deals with sections of an enterprise. It may happen that
the managers evaluated solely on the basis of the level of ROE ratio, i.e. have a clear goal of
a certain ROE level acceptable, after having reached such sufficient level for the positive
evaluation of the management, are then reluctant to take risk of new projects for the fear that
this would lower the achieved level of return.
Important feature of ROE is that using the financial statements it is possible to calculate its
level from the past (Bodie, Kane, Marcus, 2009, p. 637), but for the recommendations and
assessment of the future financial events, it is advised to employ forecasts, not the historical
data.
Another significant remark towards ROE is the fact that it is calculated for the nominal
values. The calculation for the real figures requires refining the ratio from the effect of
inflation. It is particularly important from the point of view of an investor who anticipates the
growth of the wealth.
ROE IN FOOD COMPANIES LISTED ON THE WARSAW STOCK EXCHANGE
The aim of this research is to calculate the ROE ratio in the food sector companies listed on
the Warsaw Stock Exchange during the period of 1998 – 2008 and formulating using
different methods of calculation and indications of its changes. In this respect authors take
into consideration two basic methods of calculating ROE
1. ROE end =
Net profit / Equity at the end of the accounting period
2. ROE avg =
Net profit / The average of the equity from the beginning and end of the accounting
period
It happens that changes of the equity do not occur during the accounting period or sometimes
are relatively small, however, from the point of view of dynamic character of equity and the
fact that actual figures are counted in small percentage points it is better to calculate on the
basis on the average equity.
The food sector companies listed on the Warsaw Stock Exchange may be characterized by
three subperiods within the years 1998 – 2008.
1. 1998 – 1999, when ROE was relatively at low level and in several cases it reached
negative territories.
2. 2000 – 2003, when ROE was at relatively low level but the negative figures were
sporadic.
3. 2004 – 2008, when ROE was at relatively higher level and the average for the
sector reached double figures values.
Analysis of all above companies prove that only in the period 2006-2007 all of them
displayed ROE at the positive levels. In all remaining years at least one food company
demonstrated the negative ROE.
It is symptomatic that among 8 companies listed constantly on the Warsaw Stock Exchange
within the research period, as many as 7 recorded at least once the negative ROE. There is
only one company “Jutrzenka S.A.”, which ROE has been always at the positive territories,
however, twice only at decimal fractions of a percent. It seems that the fact of listing on the
stock exchange, the experience of the management of the publicly listed company, advise
from the professional consultants and observing investors’ expectations, and in some cases
extorting necessary changes in operations result in gradual growth of the ROE ratio. The
periods of the negative ROE are never longer than two years and the return on the positive
levels is in majority durable and the gradual consolidation is noted.
For all food companies listed on the Warsaw Stock Exchange in years 1998 -2008 the ROE
ratio was calculated with the implementation of both possible denominators: the amount of
equity at the end of the year and the average equity for the given year. Calculating the
average equity is justifiable, because the profit is made throughout the year, so one has to
implement the level, that is the most close to the year average equity.
Table 1. Return on Equity ROE for food sector stock listed companies
Jutrzenka
ROE end
ROE avg
1998
7,18
7,33
1999
2,90
2,88
2000
1,85
1,84
2001
3,39
3,46
2002
0,53
0,52
(ROEend-ROEavg)/ROEavg
-2,0%
0,8%
0,5%
-2,2%
3,3%
Mieszko
ROE end
ROE avg
1998
-15,83
-14,67
1999
10,48
11,06
2000
12,64
13,49
2001
2,51
2,40
2002
12,17
14,21
2004
20,73
23,60
2005
10,49
11,07
2006
12,52
13,37
9,4% -12,2%
-5,3%
-6,3% -16,0% -33,8%
2004
0,23
0,31
2005
2,04
2,06
2006
3,06
3,11
2007
4,26
4,36
2008
6,34
7,01
7,9%
-5,2%
-6,3%
18,1% -24,1%
-1,0%
-1,5%
-2,1%
-9,6%
Wawel
ROE end
ROE avg
1998
-23,29
-20,71
1999
-49,96
-40,26
2000
8,66
9,05
2001
9,75
10,54
2002
6,94
7,09
2003
10,52
10,96
2005
25,38
29,08
2006
32,81
39,25
2007
14,25
15,34
2008
14,62
15,27
(ROEend-ROEavg)/ROEavg
12,4%
24,1%
-4,3%
-7,6%
-2,2%
-4,1% -14,7% -12,7% -16,4%
-7,1%
-4,3%
Indykpol
ROE end
ROE avg
1998
1,17
1,18
1999
-7,28
-7,03
2000
8,77
10,21
2001
6,67
6,88
2002
3,46
3,52
2003
11,79
12,52
2004
16,39
17,86
2005
17,06
21,14
2006
8,81
9,21
2007
12,69
13,55
2008
-16,01
-14,83
(ROEend-ROEavg)/ROEavg
-0,6%
3,6% -14,1%
-3,0%
-1,7%
-5,9%
-8,2% -19,3%
-4,4%
-6,3%
8,0%
Kruszwica
ROE end
ROE avg
1998
-10,96
-13,58
1999
-73,43
-53,71
2000
7,88
9,13
2001
6,09
6,32
2002
7,56
7,86
2003
25,34
29,01
2004
19,47
21,57
2006
8,68
12,09
2007
7,36
7,35
2008
23,59
25,40
(ROEend-ROEavg)/ROEavg
-19,3%
36,7% -13,6%
-3,6%
-3,8% -12,7%
-9,7%
0,0% -28,2%
0,1%
-7,1%
1998
5,10
8,97
1999
6,07
6,23
2000
1,50
1,60
2001
-0,35
-0,39
2002
7,02
3,84
2003
18,46
18,31
2004
9,74
10,27
2005
26,51
26,41
2006
35,26
30,17
2007
49,69
46,31
2008
54,32
50,82
-43,1%
-2,6%
-6,8% -10,5%
82,9%
0,8%
-5,1%
0,4%
16,9%
7,3%
6,9%
Wilbo
ROE end
ROE avg
1998
12,33
13,14
1999
5,33
5,33
2000
6,79
7,03
2001
1,60
1,61
2002
-7,15
-7,11
2003
2,93
2,97
2004
-2,13
-2,11
2005
-16,30
-15,07
2006
2,26
2,28
2007
9,29
9,75
2008
5,53
5,68
(ROEend-ROEavg)/ROEavg
-6,2%
0,1%
-3,4%
-0,8%
0,6%
-1,5%
1,1%
8,1%
-1,1%
-4,6%
-2,8%
Pepees
ROE end
ROE avg
1998
9,40
9,73
1999
-2,67
-2,64
2000
9,64
10,15
2001
1,78
1,79
2002
0,31
0,31
2003
4,46
4,57
2004
2,80
3,27
2005
-0,24
-0,24
2006
1,56
1,67
2007
85,76
71,73
2008
-1,84
-1,85
(ROEend-ROEavg)/ROEavg
-3,4%
1,3%
-5,0%
-0,9%
-0,2%
-2,2% -14,4%
0,4%
-6,8%
19,6%
-0,5%
Food sector average
ROE end
ROE avg
1998
-1,86
-1,08
1999
-13,57
-9,77
2000
7,22
7,81
2001
3,93
4,08
2002
3,86
3,78
2003
5,37
6,61
2005
9,80
10,99
2006
13,12
13,89
2007
26,95
25,86
2008
10,91
11,07
(ROEend-ROEavg)/ROEavg
Żywiec
ROE end
ROE avg
(ROEend-ROEavg)/ROEavg
4,5% -14,3%
2003
5,73
5,24
2003
-36,23
-30,68
2004
27,72
32,51
2004
11,87
13,41
2005
13,47
13,47
2007
32,30
38,46
2008 diff
0,71
1,07
-5,8%
-3,1%
-3,3%
-4,7%
-5,6%
4,3%
-0,9%
-1,1%
Table 1: Return on Equity (ROE) calculated on the basis of end of the period figure and on
the basis of the average for the accounting period.
Source: own calculations
The results showing the difference between two formulas are presented in the table in the
position:
difference between ROEend and ROEavg = (ROEend – ROEavg)/ROEavg x 100%.
The average of these values in the consecutive 11 years is shown in the last column. For 7
among 8 researched companies this deviation is in negative territories between -5,0 and -0,9
% what indicates the systematic growth of the equity in these companies.
The significant remark is that the figures obtained with the calculations using the average
amount of equity are usually higher than these obtained with the calculations using the period
end figures. Such a phenomenon is to be explained by the fact that the equity in companies
has a general growth tendency what is in line with the real sense of the company’s existence
whose aim is the maximisation of the profit from the owners capital. The part of this profit
after taking off the dividend is retained in the company and in the consequence makes the
equity grow.
From the point of view of the investor a question arises, how to evaluate the economic gist of
the investment in the food sector companies listed on the exchange. For the financial investor
the return of such an investment is measured as the total of the paid dividend and the capital
gains measured as the difference between the selling price and the purchase price reduced by
the transaction costs. Such a view includes in itself two main factors influencing the market
price of shares: the company’s financial results raising or lowering its value and the influence
of general market forces not linked with the financial situation of the particular company –
and these two independent factors are always interacting in the same time. If so to exclude
the influence of the market forces as general, the basic factor to measure the economic
meaning of the investment should remain the net profit. In the context of the capital
investment it is shown in the ROE ratio.
In this case the question arises to what level compare the ROE ratio in order to receive the
answer for the real meaning of the investment in the given company. It is possible to compare
this ratio to the level of inflation to receive the return in the real values rather than in the
nominal values. This approach has a substantial limitation because the way of construction of
the ratio by taking numerator and denominator from the same moment of time reduces the
influence of the inflation.
MARKET RISK FREE INVESTMENTS
An alternative way to calculate the efficiency of the investment is to compare it with the
market free risk investments. The scientists from the corporate finance domain do not agree
as to the exact definition of the “market free risk investment”. In a logic sense, it means the
investment at the highest return without any risk. The question of risk is crucial. It possible to
assume that the instruments issued by the State Treasury or by a bank of the highest rating are
the market risk free instruments. However even at the best banks and even in the case of
countries there is a certain risk of insolvency. To create the market risk free investment level
it is possible to calculate the average of the deposit interest for all the banks in the given
economy. The solution is however not acceptable from the point of view of a real investor
because as the place for creating a deposit only one or just a few banks could be used, and
they may carry much higher risk than an average for all the banks.
There is a possibility to use the deposit level on the interbank market as this one which is
minimal to reach in the given market conditions, so in the case of Poland it may be WIBOR
(Warsaw InterBank Offered Rate). The argument to reject this rate is that in the given
moment it is a result of the current market forces and its employment at the date of the end of
the year bares the risk of tampering with the results.
Another benchmark for the market risk free investment could be one of the National Bank of
Poland interest rates. Among these rates the most suitable seems to be the reference interest
rate as this one which is the basis to calculate other interest rates and instruments in the
national economy. The weakness of this approach lies in the fact that there are no instruments
accessible for the financial investors that would use as the basis the reference interest rate.
As the proper benchmark to use as the market risk free investment one can employ only the
instruments issued by the State Treasury. From all of them as the market risk free one can
point at the Treasury Bills and Treasury Bonds. In respect to the multitude of these papers,
the fundamental question arises which of them are the best to implement. In the practice of
investment banking as the most suitable one considers 52 weeks Treasury Bills or current
Treasury Bonds. Treasury bills are the instruments that bare slightly lower risk but at the
same time are less commonly accessible.
From the above reasoning the conclusion comes that the best solution would be to use the
return obtained either from 52 week Treasury Bills or from 2 years Treasury Bonds. During
the research the list of returns of these bills and bonds was created and the levels were
compared. The figures concern the levels from the last trades in the given calendar year.
Table 2. The market risk free investment in Poland
last trades in year
2002
2003
2004
2005
2006
2007
2008
52 weeks Treasure bills
5,69
5,97
6,37
4,32
4,21
5,74
5,92
2 years Treasury bonds
5,51
6,14
6,12
4,54
4,62
6,19
5,47
difference
0,18
-0,17
0,25
-0,22
-0,41
-0,45
0,45
mean of differences
total
-0,05
Table 2. The market risk free investment shown as the 52 weeks T-bills and the 2 years Tbonds and the difference between them.
Source: own calculations
In the header of the table the years are put in the meaning of the date of the last trading
session for the given year. In the lines of the table there are: return on 52 weeks T-bills, return
on 2 years T-bonds, the difference of these instruments in the percentage points, the mean of
the differences in the percentage points.
The above conducted calculations show that the long term difference between the return of 52
weeks T-bills and the 2 years T-bonds is negligible, sometimes the first is higher, sometimes
the second, and the mean of the differences for the whole period is very small and amount to
only 0,05 of a percentage point.
Table 3. The return on equity ROE versus the market risk free investment
Jutrzenka
ROE end
Market risk free basis end
1998
7,18
12,59
1999
2,90
15,83
2000
1,85
17,26
2001
3,39
10,84
2002
0,53
5,69
2003
5,73
5,97
2004
20,73
6,37
2005
10,49
4,32
2006
12,52
4,21
2007
32,30
5,74
2008
0,71
5,92
ROE avg
Market risk free basis avg
7,33
18,33
2,88
14,21
1,84
16,55
3,46
14,05
0,52
8,27
5,24
5,83
23,60
6,17
11,07
5,35
13,37
4,27
38,46
4,98
1,07
5,83
Mieszko
ROE end
Market risk free basis end
1998
-15,83
12,59
1999
10,48
15,83
2000
12,64
17,26
2001
2,51
10,84
2002
12,17
5,69
2003
-36,23
5,97
2004
0,23
6,37
2005
2,04
4,32
2006
3,06
4,21
2007
4,26
5,74
2008
6,34
5,92
ROE avg
Market risk free basis avg
-14,67
18,33
11,06
14,21
13,49
16,55
2,40
14,05
14,21
8,27
-30,68
5,83
0,31
6,17
2,06
5,35
3,11
4,27
4,36
4,98
7,01
5,83
Wawel
ROE end
Market risk free basis end
1998
-23,29
12,59
1999
-49,96
15,83
2000
8,66
17,26
2001
9,75
10,84
2002
6,94
5,69
2003
10,52
5,97
2004
27,72
6,37
2005
25,38
4,32
2006
32,81
4,21
2007
14,25
5,74
2008
14,62
5,92
ROE avg
Market risk free basis avg
-20,71
18,33
-40,26
14,21
9,05
16,55
10,54
14,05
7,09
8,27
10,96
5,83
32,51
6,17
29,08
5,35
39,25
4,27
15,34
4,98
15,27
5,83
Indykpol
ROE end
Market risk free basis end
1998
1,17
12,59
1999
-7,28
15,83
2000
8,77
17,26
2001
6,67
10,84
2002
3,46
5,69
2003
11,79
5,97
2004
16,39
6,37
2005
17,06
4,32
2006
8,81
4,21
2007
12,69
5,74
2008
-16,01
5,92
ROE avg
Market risk free basis avg
1,18
18,33
-7,03
14,21
10,21
16,55
6,88
14,05
3,52
8,27
12,52
5,83
17,86
6,17
21,14
5,35
9,21
4,27
13,55
4,98
-14,83
5,83
Kruszwica
ROE end
Market risk free basis end
1998
-10,96
12,59
1999
-73,43
15,83
2000
7,88
17,26
2001
6,09
10,84
2002
7,56
5,69
2003
25,34
5,97
2004
19,47
6,37
2005
13,47
4,32
2006
8,68
4,21
2007
7,36
5,74
2008
23,59
5,92
ROE avg
Market risk free basis avg
-13,58
18,33
-53,71
14,21
9,13
16,55
6,32
14,05
7,86
8,27
29,01
5,83
21,57
6,17
13,47
5,35
12,09
4,27
7,35
4,98
25,40
5,83
Żywiec
ROE end
Market risk free basis end
1998
5,10
12,59
1999
6,07
15,83
2000
1,50
17,26
2001
-0,35
10,84
2002
7,02
5,69
2003
18,46
5,97
2004
9,74
6,37
2005
26,51
4,32
2006
35,26
4,21
2007
49,69
5,74
2008
54,32
5,92
ROE avg
Market risk free basis avg
8,97
18,33
6,23
14,21
1,60
16,55
-0,39
14,05
3,84
8,27
18,31
5,83
10,27
6,17
26,41
5,35
30,17
4,27
46,31
4,98
50,82
5,83
Wilbo
ROE end
Market risk free basis end
1998
12,33
12,59
1999
5,33
15,83
2000
6,79
17,26
2001
1,60
10,84
2002
-7,15
5,69
2003
2,93
5,97
2004
-2,13
6,37
2005
-16,30
4,32
2006
2,26
4,21
2007
9,29
5,74
2008
5,53
5,92
ROE avg
Market risk free basis avg
13,14
18,33
5,33
14,21
7,03
16,55
1,61
14,05
-7,11
8,27
2,97
5,83
-2,11
6,17
-15,07
5,35
2,28
4,27
9,75
4,98
5,68
5,83
Pepees
ROE end
Market risk free basis end
1998
9,40
12,59
1999
-2,67
15,83
2000
9,64
17,26
2001
1,78
10,84
2002
0,31
5,69
2003
4,46
5,97
2004
2,80
6,37
2005
-0,24
4,32
2006
1,56
4,21
2007
85,76
5,74
2008
-1,84
5,92
ROE avg
Market risk free basis avg
9,73
18,33
-2,64
14,21
10,15
16,55
1,79
14,05
0,31
8,27
4,57
5,83
3,27
6,17
-0,24
5,35
1,67
4,27
71,73
4,98
-1,85
5,83
Food sector average
ROE end
Market risk free basis end
1998
-1,86
12,59
1999
-13,57
15,83
2000
7,22
17,26
2001
3,93
10,84
2002
3,86
5,69
2003
5,37
5,97
2004
11,87
6,37
2005
9,80
4,32
2006
13,12
4,21
2007
26,95
5,74
2008
10,91
5,92
ROE avg
Market risk free basis avg
-1,08
18,33
-9,77
14,21
7,81
16,55
4,08
14,05
3,78
8,27
6,61
5,83
13,41
6,17
10,99
5,35
13,89
4,27
25,86
4,98
11,07
5,83
Table 3. The return on equity (ROE) versus the market risk free investment.
Source: own calculations.
In line with the above conducted calculations to the further calculations as the market risk
free investment it was taken the 52 weeks T-bills as presented by the National Bank of
Poland. In practical frame the market risk free maximal investment brings the highest
possible rate of return. One can say that it is the highest return for the investor without risk
and effort from the side of the investor. As the benchmark it is going to be compared with the
ROE ratio of the food sector companies listed on the Warsaw Stock Exchange. For the
comparisons two parallel calculations are implemented
1. ROE with denominator as at the end of the year and the return of 52 weeks T-bills as at the
end of the year.;
2. ROE with denominator as the yearly average of equity and the return of 52 weeks T-bills
shown as the yearly average.
The aim of this research is to show an economic meaning of an investment in the company as
such. The crucial counting lies in the proper return on equity and in this context several
questions are ignored: a) possibility to achieve capital gain on the stock exchange, b) the
dividend, which in practice during this period was very rarely paid on the Warsaw Stock
Exchange.
From the point of view of the investor two alternative investments are concerned:
1. In the food sector company listed on the stock exchange with return shown in ROE
2. Market risk free investment assumed in the 52 weeks T-bills.
Some purists say that there should be no use of negative ROE because while there is a net
loss at the end of the accounting period one cannot count return because there is no return. In
mathematical meaning however the negative ROE shows the loss on the capital invested in
the company. ROE is a measure of effectiveness of the equity, but not the real return for the
investor – as it is in the case of the 52 weeks T-bills – so it measures how effectively the
capital given by the shareholders is employed, but not how much earning it gives. Hence it is
treated here as the theoretical measure of the return on investment.
CONCLUSIONS
Characteristic feature is that in the years 1998 – 2001 all food sector companies listed on the
WSE has shown the ROE below the market risk free levels. It proves that during these years
the investors would have been better of just to buy the alternative market risk free
instruments rather than invest in the companies.
There are as well companies that almost in all the years show the ROE below the market risk
free investment (Pepees, Wilbo, Mieszko). It leads to the conclusion that the shareholders of
these companies would have done better if they have had invested in the 52 weeks T-bills
instead.
The positive feature is that during the period 2003 – 2008 majority of researched companies
from food sector listed on the WSE have shown that the managers of these companies were
able to use properly the equity available.
The food sector is represented on the Warsaw Stock Exchange weaker than it is in the whole
Polish economy. This sector is not searched by the financial investors. As the result many
companies were withdrawn from the exchange during the listings. The presented research is
an attempt to find the answer to the question why the food sector is so little represented on
the stock exchange. The indicated low levels of ROE may be one of the crucial reasons. The
positive feature is that in recent years the level of ROE is gradually rising.
The practice of the Warsaw Stock Exchange was that the dividend was rarely paid off to the
investors and the market was a subject to substantial fluctuations so the capital gain was very
unstable.
The same research tool served as well to indicate that at the end of the researched period the
food sector companies that survived on the stock exchange began to show the ROE results
much higher than alternative ways of the safe market risk free instruments.
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