RETURN ON CAPITAL IS VERY IMPORTANT
The example early on this page shows that debt financing can be used to increase the rate of return on equity. This can be misleading and also problematical if interest rates rise or fall. This is probably one reason why Warren Buffett prefers companies with little or no debt. The rate of return on equity is a true one and future earnings are less unpredictable.
A careful investor like Buffett would always take rates of return on total capital into account. The average rates of return of capital in the companies in Berkshire Hathaway portfolio are:
Coca Cola 39.12
American Express 13.68
A comparison of the rates of return on equity and capital for these three companies is significant and the reader can make their own calculations.
COMPANY RATES OF RETURN ON EQUITY