Ciba Gator

The Truth Behind Accenture’s High Return on Equity

Dan,
In the interests of my sanity I will not harp on about how you have mangled the share count/class structure of ACN's shares. I will just say that when calculating your ROE figure, you have to reduce equity by the value of the minority interest equity value when using the lower share count. That aside....

If I understand the conclusion of your analysis correctly (please correct me if I am wrong), you are saying that if Accenture had not bought back any shares since 2004 (thereby increasing treasury shares and reducing equity), then their ROE would be lower. Is that right? Two thoughts:

1) You neglected to add back interest income on the substantial amount of cash used to buy back shares. If you are making the assumption that treasury shares should remain at 6 million, then you have to assume that the cash used to buy those 30 million net shares would be throwing off substantial interest income, which would boost ROE.

2) OF COURSE if the company lets cash sit in a bank account its ROE will be lower than if it gives that cash back to shareholders. Classic capital allocation decision--maximize returns on capital. If they could take that cash and invest it in business operations or investments that would be accretive to ROE, then they would not buy back shares. But since the company does not need cash to run its operations, they give it back to shareholders.

A little too much analysis to come to a very basic answer.