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Author: ahlgren Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 4927  
Subject: Buffett's definition of ROE? Date: 4/12/2003 9:17 PM
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Haven't I heard Buffett and Munger say that they define ROE as return on total capital, which is roughly the same thing as ROA?

I saw a stat today where the S&P's ROE in Q3 1999 was 22.17, but their return on assets was 13.27. I'm not saying the market wasn't overvalued at the time, because I believed, and still believe, that it was. But an ROA of 13.27 is pretty realistic, is it not?

Paco
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Author: brrkr Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4911 of 4927
Subject: Re: Buffett's definition of ROE? Date: 4/12/2003 10:53 PM
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Somewhat related, but OT

A tag-along question;

Return on Equity

Return on Capital

Return on EQUITY CAPITAL

Warren uses EQUITY CAPITAL often; what's EQUITY CAPITAL ?


Thanks
brrkr

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Author: peterxyz Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4912 of 4927
Subject: Re: Buffett's definition of ROE? Date: 4/13/2003 3:36 AM
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ROE is not the same as return on total capital which is not necessarily the same as return on assets (ROA)

clearest example is a bank Granite (GRAN) has about a 2% return on assets but because it is leveraged up (as are all banks) its return on equity is about 12%.
http://biz.yahoo.com/p/g/gran.html

Return on capital is a bit valgue to me - I think the fool did some measure like return on invested capital ROIC which a search might turn up, but 'capital' is a pretty unspecific term - which leads onto the fact that I *guess* that 'Equity Capital' is the same as 'Equity'

... as usual the advice is worth what you paid for it ;)

peter xyz

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Author: ValueSnark Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4925 of 4927
Subject: Re: Buffett's definition of ROE? Date: 7/3/2004 2:49 PM
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ROE is not the same as return on total capital which is not necessarily the same as return on assets (ROA)

Return on capital is a bit valgue to me - I think the fool did some measure like return on invested capital ROIC which a search might turn up, but 'capital' is a pretty unspecific term - which leads onto the fact that I *guess* that 'Equity Capital' is the same as 'Equity'

... as usual the advice is worth what you paid for it ;)

Your last comment applies to this post as well.

I assume that ROA is more meaningful for banks and other financial institutions (asset managers, brokers, etc.) because they are in the business of gathering assets and "selling money" or advice on how to make money.

Return on capital or ROIC refers to the return on a firm's total capital structure, which consists of the total of its shareholders' equity and debt.

Alfred Rappaport has some good discussion of the shortcomings of these various terms in his book _Creating Shareholder Value_ 2nd ed.
See also Rappaport and Michael Maboussin, _Expectations Investing_.
Fools should have these books.

They also have a good website, which I think is www.expectationsinvesting.com.

ValueSnark


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