One of the key finance principles: “A company that earns a return on equity in excess of its cost of equity capital has added value.”
Thank my friend, James again for his effort in extracting the following info – a quick snapshot of the Malaysian banking sector:
The following chart shows the significant relationship between price-to-book of banks and the difference between its return on equity and cost of equity:
In a nutshell, if ROE is higher than COE, it is generally expected that the bank will trade at a higher price to book.
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