Return on equity is one of the most widely used quality metrics in investing, and one of the easiest to manufacture. Here is what it measures, how to take it apart, and when to trust it.
Perhaps the best use of ROE is as a question rather than an answer. When the number is unusually high, the first task is determining whether the source is operational excellence or financial engineering.
Great points! Why bother with ROE? Just use ROIC. Isn’t ROE a waste of time?
The profitability fools at the most is ROE.
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The profitability fools at the least is ROA.
Perhaps the best use of ROE is as a question rather than an answer. When the number is unusually high, the first task is determining whether the source is operational excellence or financial engineering.