Authorized ROEs shrink over time.
This year’s Fortnightly 40 survey showed that while F40 companies have grown their average return on equity (ROE) in the past three years, those returns have grown slowly compared to some other measures—including appreciation in share prices.
Of course, share prices might be expected to fluctuate more than ROE figures do, since a company’s stock is subject to short-term trading trends that have only secondary effects on ROE. And the F40’s two-year rise in average ROE—128 basis points—is really nothing to sneeze at.
Nevertheless, anecdotal evidence suggests the industry’s ROE is straining under increasing pressure. Regulated returns, in particular, face intense public scrutiny as commodity prices and infrastructure costs increase.