📖Warren Buffett

High Return on Equity

🌳 Advanced★★★★☆

Consistently high return on equity signals a business with genuine competitive advantages. Companies with high ROE can generate more profits with less capital, providing more funds for reinvestment or dividends. When analyzing ROE, one should: Exclude one-time items, Consider the impact of leverage, Examine long-term trends, and Compare with industry peers. ROE (Return on Equity) measures a company's efficiency in generating profits from shareholders' capital. A figure above 15% is considered excellent, while exceeding 20% is outstanding. Key insight: ROE measures how efficiently a company turns shareholder capital into profit. Start with a minimal checklist: Is ROE consistently above 15%?; Is high ROE achieved without excessive leverage?; Has ROE been stable for 10+ years?.

  • Is ROE consistently above 15%?
  • Is high ROE achieved without excessive leverage?
  • Has ROE been stable for 10+ years?
  • Is high ROE sustainable going forward?

Avoid misuse: Higher ROE is preferable - it is essential to distinguish whether it stems from genuine operational efficiency or from the use of high leverage.

💬

The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed.

— 1979 Berkshire Hathaway Letter to Shareholders，1979

🏠 Everyday Analogy

Just like opening a restaurant: if you invest 100,000 in renovation and equipment and earn a net profit of 20,000 in a year, your ROE is 20%. A good manager ensures every bit of capital works efficiently to generate returns, rather than letting money sit idle in the account. A company with high ROE is like a capable manager who knows how to make money work.

📖 Core Interpretation

ROE (Return on Equity) measures a company's efficiency in generating profits from shareholders' capital. A figure above 15% is considered excellent, while exceeding 20% is outstanding.
💎 Key Insight：ROE measures how efficiently a company turns shareholder capital into profit. A business consistently earning 20%+ ROE without excessive leverage likely possesses a durable moat. But beware of companies that achieve high ROE through heavy debt or by shrinking equity through buybacks — look for organic, sustainable returns on capital.

AI Deep Analysis

Get personalized insights and practical guidance through AI conversation

❓ Why It Matters

Companies with high ROE can generate more profits with less capital, providing more funds for reinvestment or dividends.

🎯 How to Practice

When analyzing ROE, one should: 1. Exclude one-time items, 2. Consider the impact of leverage, 3. Examine long-term trends, and 4. Compare with industry peers.

🎙️ Master's Voice

We like to buy businesses with high returns on capital employed, and we don't like to pay much for them.
Buffett seeks businesses earning 20%+ return on equity without using much debt. Coca-Cola, Apple, and See's Candies all fit this profile. High ROE indicates pricing power, operational efficiency, and competitive advantages that generate excess profits year after year.

⚔️ Practical Guide

✅ Decision Checklist

  • Is ROE consistently above 15%?
  • Is high ROE achieved without excessive leverage?
  • Has ROE been stable for 10+ years?
  • Is high ROE sustainable going forward?

📋 Action Steps

  1. Calculate ROE for the past 10 years
  2. Decompose ROE into margin, turnover, and leverage
  3. Compare ROE to industry peers
  4. Prefer companies with high unlevered ROE

🚨 Warning Signs

  • High ROE from excessive debt
  • Declining ROE trend
  • ROE below cost of equity
  • Inconsistent profitability

⚠️ Common Pitfalls

✕Higher ROE is preferable - it is essential to distinguish whether it stems from genuine operational efficiency or from the use of high leverage.
✕A high ROE for a single year does not necessarily indicate a good company — focus on the 5-10 year average ROE.

📚 Case Studies

1
See's Candies (1972)
ROE consistently exceeding 100% over the long term.
✨ Outcome：Able to grow with minimal additional capital required.
2
Coca-Cola (1988)
ROE has consistently remained above 30% over the long term.
✨ Outcome：Light brand assets and high capital efficiency

📌 Save this principle as your rule

One click to drop it into your personal rule library — every future trade will be scored against it.

See how masters handle real scenarios?

30 real investment dilemmas answered by legendary investors

Explore Scenarios →