No. of Recommendations: 8
I think part of my mental block related to retained earnings is that I don't entirely trust management to return earnings later on when the company can't deploy them internally at a sufficient rate of return.

There are never any guarantees for the future, but one good metric for evaluating management is RORE, or Return on Retained Earnings. I got this from a lecture given by a very savvy money manager, and I've used it ever since. The calculation is very simple:

(Y2_Ret'd_Earnings - Y1_Ret'd_Earnings) / ((Y1_Ret'd_Earnings + Y2_Ret'd_Earnings) / 2)

If you calculate this number over a series of years it will give you an excellent picture of how well management is doing with the money you let them keep. A management which consistently stays over 15% on this number is very good, if they're frequently over 20% they are superstars.
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