Buffett likes companies with high and increasing returns on equity (ROE)

HIGH RETURNS ON EQUITY

Buffett is interested in companies that have rights rates of earnings on equity and likes them even more where the return rates are increasing. He reasons that, with a company like this, he is better off if the company pays no or little dividends and retains the money to earn even more for its owners.

• In addition, where no dividend is received, there is no income tax payable by the shareholder. 
• Instead, the investor gets the value of the increase in value in the shares which will, eventually, rise to reflect the enhanced earnings. 
• The shareholder can then retain the shares, sell them at a time that best suits them, if they wish, and take advantage of the capital gains taxation regime.

It is why potential investors should calculate the company’s history of returns on equity and management of retained earnings.