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Author: EliasFardo Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212011  
Subject: Re: Berkshire buys Heinz Date: 2/18/2013 11:47 PM
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anyone awake should see Buffett in teh last couple of yrs is focused on ROE.

Well, I think he always has, maybe he has not talked about it a lot.

I also am a big fan on high returns on equity, but there is a warning I would like to add. Heinz is an example. It gets a very high return on equity. But, return on equity can get distorted by the amount of dividends and stock buybacks that a company employees. Of course, if a company is able to drive down its equity with dividends and buybacks and still fully operate it means that it does not require huge amounts of capital, which is a good thing. But, especially when just comparing companies, the return on equity figure can be misleading.

Maybe of more importance is the return on net assets employed. It will strip out the effect of leverage on the operating results. After all, what you want is a company that can get high returns on the employment of new assets. A company that has trouble growing can still report a healthy return on equity simply by using dividends and stock buybacks as much as possible.

What if the Golden Gate Bridge had been built by a for-profit corporation. By now, it would be fully depreciated, with a book value and therefore equity of very little. If it was allowed to earn any kind of profit appropriate to its replacement cost, it would show an incredible return on equity. But, its opportunities for organic growth would be limited.
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