Answer for calculating ROE

Hi Bryan,
You are absolutely right that the most recent quarter’s financial results may affect the quartile 1 ROE. As such, I typically add an extra column after the most recent year’s  financial results in my Excel file and label it “Most Recent 4Q”. For the income statement, this is basically the sum of the results over the most recent 4 quarters. For example, in 1Q 2015, I would take the sum of the net income from 2Q 2014, 3Q 2014, 4Q 2014 and 1Q 2015. However, as the balance sheet is as at the end of the quarter, I would use the figure reported in 1Q 2014 (using the beginning equity rather than ending equity, provided that there’s no additional capital raised by the company from the shareholders during those period). If there is, then half of that amount raised should be added to beginning equity. 
The above “adjustment” adds an imaginary year after the year 2014. Doing this allows a year on year comparison. Otherwise, if we only use the most recent quarter’s net income, it is only income from 1 quarter, and dividing it by the Total Equity (which is for the whole year), will severely understate the ROE. Hence, we need to use the sum of the net income of the most recent 4 quarters and divide by the Total Equity to get the ROE. 
That said, the min PB that you are willing to pay may still vary from quarter to quarter. It is also important to keep in mind whether the quality of the business has changed. 

About The Author

Peter Lim

Investor (Not Speculator).