ROE in Action

ROE in Action

Using Value Line as the source, IBM's ROE was a paltry 5% in the 1991-1993 timeframe. At that point, now-retired chairman and CEO Louis Gerstner took over. Through a balanced combination of profitability, productivity and capital structure initiatives, ROE rose quickly to the 20-25% range in 1995, and has been over 30% for most years since. Even maintaining ROE at a steady figure requires performance improvement, unless all returns are paid to shareholders.

Share buybacks have been one of the keys to ROE performance. When Gerstner took over, IBM had about 2.3 billion shares outstanding. Today, that figure hovers at about 1.5 billion - IBM has retired about a third of its shares. Meanwhile, per-share cash flow has risen from about $3 to over $10 per share.

Looking at IBM's track record, it's clear that Gertsner placed particular emphasis on managing ROE and its components. He managed the owner's bottom line - not just sales growth, earnings reports, and image. He took the concept of ROE to heart.

2008

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One of the best ways to understand a concept or approach to investing is by example. It's hard to find a "pure" example of strategic financial excellence culminating in a world-class ROE performance.

Companies may perform well and indeed have ROE in their sights, but difficult business conditions or changing markets make actual performance in all areas and "drivers" a mixed bag.

A search of typical "value" businesses, even in the Buffett/Berkshire portfolio, yields mostly mixed results.