Did you know ROE equals IRR?
Below is a Finite Owner’s Equity Statement from demo#2
| FINITE OWNER'S EQUITY STATEMENT | 0 | 1 | 2 | 3 | 4 | 5 | ||
| [1] | Beginning Equity | [4] | 100 | 90 | 79 | 67 | 53 | |
| [2] | Net Income | demo#2 | (180) | (462) | 151 | 383 | 1,003 | |
| [3] | Issue/(Dividend) | demo#2 | 100 | 170 | 451 | (164) | (397) | (1,056) |
| [4] | Ending Equity | SUM([1]:[3]) | 100 | 90 | 79 | 67 | 53 | 0 |
| [5] | Net Income NPV | NPV([30%],[2]:[2]) | 61 | |||||
| [6] | Outstanding Equity NPV | NPV([30%],[1]:[1]) | 204 | |||||
| [7] | Internal Rate of Return (IER) | [5]/[6] | 30% | |||||
| [8] | Internal Rate of Return (IRR) | IRR([3]:[3] | 30% | |||||
| [9] | Difference | [7]-[8] | 0.E+00 |
The multi-period ROE, labeled as Internal Equity Return (IER), Line [7] equals Internal Rate of Return (IRR), Line [8]. ROE is synonymous with accrual net income and IRR is synonymous with cash flow.
Investment opportunities evaluated with Full Picture Investment’s methodology create affirming financial statements with an Owner’s Equity Statement, an Owner’s Equity Statement where IER equals the investment opportunity’s return and they in-turn equal the Owner’s Equity Statement’s IRR.
Full Picture Investment’s unifying investment methodology is simultaneously both accrual and cash focused.
1The phrase Internal Equity Return is used in-lieu of multiple-period ROE. The phrase Internal Equity Return was chosen for its simultaneous representation of Return on Equity and Internal Rate of Return.