Analyst's Toolkit: Wal-Mart's Residual Income

Return on equity is an oft-touted factor in making investment decisions. While it shows shareholders' total returns, it fails to consider investors' required return. A measure known as residual income adjusts for the required return. That can help investors determine which investments offer the best returns over the minimum required.

In industries with several strong players, returns on equity may not provide accurate differences among the companies. Stores such as Wal-Mart(WMT Quote), Target(TGT Quote) and Costco(COST Quote) look solid, but determining which will compensate its shareholders the most can be learned by using residual income.

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