1. "The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share."
Sometimes ROE is referred to as "stockholder's return on investment." It tells the rate at which shareholders are earning income on their shares.
Always look at the return on equity (ROE) to see whether or not a company has consistently performed well in comparison to other companies within the same industry.
ROE is calculated as follows:
= Net Income / Shareholder's Equity
Just having a high ROE last year isn't enough. The investor should view the ROE from the past five to ten years to get a good idea of the historical growth.
2. seek not capital gain but ownership in quality companies that are highly capable of generating earnings.
Avoid
· Businesses that bet the farm
· Businesses dependent on research.
· Debt-burdened companies.
· Companies with questionable management
· Companies that require continued capital investment
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