Nugget: The Penman-Nissim model of profitability analysis

The Bottom Line
ROE is an important metric used to help judge how well a firm is turning shareholders’ invested capital into earnings. Breaking ROE down into a series of ratios can be even more telling, as it adds precision to the analysis by showing just how a firm is achieving its overall ROE. The Penman-Nissim framework complements other means of profitability analysis because it gives a clear and accurate picture of a firm’s core operating profitability and its use of leverage. (For more, see Profitability Indicator Ratios: Return On Equity.)

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