What Is Required Return on Equity?

ROE Return on equity. Return on equity is an accounting calculation method similar to Return on Investment. It is an indicator used to evaluate the profitability of a company. It can be used as an indicator of the profitability of different companies in the same industry.

Return on equity

Return on equity is the current year's after-tax profit divided by the beginning and end of the year

Return on equity = net profit after tax / weighted shareholder's equity

For at least the following five reasons, the return on equity has exaggerated the economic value of the enterprise:

1. The life of the project. The longer the project life, the higher the degree of economic value exaggerated.

2. Capitalization policy. The smaller the total investment is, the higher the economic value will be exaggerated.

Book

Buffett sees return on equity

Buffett prefers to use the return on equity to measure the profitability of the company. The return on equity is the company's net income divided by shareholders 'equity. It measures the company's profit as a percentage of shareholders' capital and can more effectively reflect the company's profit growth.

According to his value investment principles, the company's return on equity should be no less than 15%. Among the stocks of listed companies held by Buffett, Coca-Cola has a return on equity of more than 30%, and American Express has reached 37%.