Continuing the traits I look for when picking stocks, one that I took from Warren Buffett’s playbook is Return on Equity (ROE). ROE is a measure of how well a company is run. Basically it is the amount of earnings that a company makes on the money that it has. (For a more detailed description, along with some formulas for its calculation, see: http://beginnersinvest.about.com/od/incomestatementanalysis/a/understanding-return-on-equity.htm ).
I tend to look for companies with ROE of around 15-25%. It is also important to compare the ROE of the company against that of its peers in the industry, since this will indicate how well it is run compared to its competitors. Note that some industries, such as retail, tend to have larger ROE’s than other industries, so ruling out a company simply based on ROE of less than 15% would not be advisable.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
