Final answer:
ROE should be compared to benchmarks like a company's historical ROE, industry average ROE, and returns on alternative investments such as bonds or real estate to provide a broader context for evaluation.
Step-by-step explanation:
When assessing the Return on Owner's Equity (ROE), it is beneficial to compare it to several additional benchmarks for a comprehensive analysis. These benchmarks may include the company's past ROE performance, the average ROE within the same industry, and the returns on alternative investments such as bonds or real estate. For instance, suppose a company has a consistent increase in ROE over time; this might indicate improved operational efficiency or growing profitability.
Comparing the company's ROE to the industry average can show how well the company is performing in relation to its competitors. If a firm's ROE is higher than the industry average, it may be considered more efficient in generating profit from shareholders' equity. Lastly, alternative investment returns, like the interest rate on bonds or the rate of return from real estate, also serve as benchmarks. These help investors to determine if they should invest in the company's equity or look into different asset classes with potentially higher or more stable returns.
For example, if the average ROE in the real estate market is higher than the company's ROE, investors might prefer investing in real estate for potentially bigger gains. Understanding these benchmarks provides a broader decision-making context for investors considering the attractiveness of the ROE.