Understanding the Importance of ROE

The importance of Return on Equity (ROE)

Profits and growth drive intrinsic value.

For any fairly priced asset to increase in value over time, the value of the returns must grow.

If it isn't easy to pin down growth and the value of growth, it gets a little easier to step back and identify business characteristics that drive growth.

Sustained return on equity (ROE) implies sustained growth and blare out, "well-managed company!"

The management can control the component drivers of ROE (profitability, productivity and capital structure) to achieve growth, ROE, and hence, intrinsic value.

Whether or not you indulge in intrinsic value calculations, be aware that earnings and growth do matter.

When you look at a business, you seek consistent, growing returns on a quality asset base - achieving reasonable returns without taking on unreasonable risk.