No. of Recommendations: 11
book value is < 0
...
is indeed weird. Can you explain?
Very high quality businesses don't require much in the way of assets to earn each dollar of income: a high ROE is a good thing. A very small number of businesses require no net assets at all to make money. They are the very best businesses, with effectively infinite ROE. (often this is because their earnings are so reliable that they can sell enough bonds to buy back enough shares to fully wipe out their book equity value completely). This class of companies has included companies like Coke, Moody's, Oracle, BP, Lowe's, Philip Morris, Starbucks, Autozone, all with no positive asset value per share at all, at least some of the time.
But ROE is often calculated naively as earnings/book, so if book is negative but earnings positive you get a negative ROE figure rather than a more economically meaningful infinitely high one. A sort for high ROE will miss them.
You also get a negative ROE with positive assets and negative earnings, which is why both of them have to be checked for sign individually. You don't want these firms!
I usually check to make sure that BOTH trailing AND forward-estimate earnings are positive, to avoid accidental inclusion of a really bad business that is usually losing money but just had a one-off good period that made the trailing earnings good as a fluke. It can't hurt to also include the requirement that the projected earnings growth figure, if available, is positive and not negative, purely as a crap filter. The goal is to look for companies with regular positive earnings on the back of no net assets at all.
Jim
