Rolling ROE residual adjusted for size
factor.formula
The formula for calculating the residual return on equity after size adjustment is:
Among them, $\hat{ROE}_{t}$ is obtained by OLS linear regression:
The meanings of the parameters in the formula are as follows:
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The rolling return on equity (TTM) of the tth period. The rolling calculation method is: the sum of the net profit attributable to the parent company in the past four quarters divided by the equity attributable to the parent company in the most recent quarter.
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Total assets in period t. The annual report uses the data of the current year, that is, the total assets as of December 31; the quarterly, semi-annual and quarterly reports use the total assets data of the previous year's annual report. The purpose is to maintain the consistency of the time series in the regression analysis and reduce the fluctuations of non-business factors caused by differences in accounting standards or time nodes.
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Fitted value of return on equity (ROE) calculated by ordinary least squares (OLS) regression model for period t.
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The residual of the return on equity in period t represents the difference between the actual return on equity and the regression fitted value. The larger the residual value, the stronger the profitability of the company in that period, regardless of the total asset size.
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The intercept term of the regression model represents the expected value of the return on equity when the total assets are zero. It is usually used for model calibration.
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The slope term of the regression model represents the expected change in return on equity for every unit change in total assets, and is used to measure the impact of total asset size on return on equity.
factor.explanation
This factor is a profitability indicator adjusted for size. It eliminates the impact of total asset size on return on equity through a linear regression model, retaining the part that is more relevant to the company's intrinsic operating ability. The residual value represents the part of the company's actual profitability at its current size that exceeds the expected profit level determined by the asset size. A positive residual value means that the company has a higher profitability than its size should have, indicating that the company has stronger endogenous growth; while a negative residual implies that the company's profitability is lower than its size should have. Therefore, this factor can more accurately reflect the company's true profitability and operating efficiency, and help investors identify companies with sustainable competitive advantages.