Does Profitability Really Matter? Marginality, Volatility & $ Trillion Question

Abstract

Firm Profitability - Does it really matter for shareholder return or ROE (return on equity)? Does this question sound oxymoron and antithetic? Not really. On the contrary, evidence has surfaced that Returns on equity - based on the shareholders' equity accounted in the balance sheet - is not really directly tied to firm's profitability because it is increasingly observed that more attention is given to short-term marginal gains of the stock rather than long-term value buildup for shareholders. And higher stock gains appear to be realized through trading on a short-term basis of frequent stock-buy & sell at the right time and speed. Notwithstanding what the conventional wisdom is, the disconnect between profitability and long-term ROE is becoming the hard truth in a modern stock market, while smart investors are achieving better returns through active trading.