{"id":3543,"date":"2022-05-10T23:56:00","date_gmt":"2022-05-10T15:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=3543"},"modified":"2025-11-10T18:33:33","modified_gmt":"2025-11-10T10:33:33","slug":"the-most-important-indicator-to-judge-management-team-roe","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/10\/the-most-important-indicator-to-judge-management-team-roe\/","title":{"rendered":"ROE, the most important management indicator"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/10\/the-most-important-indicator-to-judge-management-team-roe\/#ROE_is_high_correlated_to_CEOs_ability\" >ROE is high correlated to CEO&#8217;s ability<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/10\/the-most-important-indicator-to-judge-management-team-roe\/#Average_ROE_of_US_listed_companies\" >Average ROE of US listed companies<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/10\/the-most-important-indicator-to-judge-management-team-roe\/#How_to_calculate_Return_On_Equity\" >How to calculate Return On Equity<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/10\/the-most-important-indicator-to-judge-management-team-roe\/#The_pitfalls_on_ROE\" >The pitfalls on ROE<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/10\/the-most-important-indicator-to-judge-management-team-roe\/#Buffett_on_ROE\" >Buffett on ROE<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/10\/the-most-important-indicator-to-judge-management-team-roe\/#Conclusion\" >Conclusion<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/10\/the-most-important-indicator-to-judge-management-team-roe\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"ROE_is_high_correlated_to_CEOs_ability\"><\/span>ROE is h<strong>igh correlated to CEO&#8217;s ability<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Just like there are few investment books that delve into the management team of listed companies. The same is true for financial indicators. It is difficult for us to find out that financial indicators are directly related to the management team of the company, especially &#8220;a high degree of positive correlation with the operating ability of the chief executive officer.&#8221; Of course, there are many very effective financial indicators that can be used to measure the operating efficiency of different companies, such as accounts receivable turnover rate, inventory turnover rate and so on.<\/p>\n\n\n\n<p>But those indicators may not be applicable to all industry, and secondly, you may have to calculate it yourself. Financial websites may not necessarily provide these indicators for every company. This article will propose two indicators that are easy to read immediately, and will be provided for every company on almost any financial website, applicable to all companies. I personally think that compared with other financial indicators, it is a financial indicator that can be used to measure the CEO&#8217;s ability to operate.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Average_ROE_of_US_listed_companies\"><\/span>Average ROE of US listed companies<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Buffett mentioned in his 1981 shareholder letter that the return on equity of US listed companies was about 14%. According to the statistics of New York University in January 2023, the return on shareholders&#8217; equity of US listed companies is about 16.47%.<\/p>\n\n\n\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"How_to_calculate_Return_On_Equity\"><\/span><strong>How to calculate Return On Equity<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The Return On Equity (ROE) algorithm is &#8220;net profit after tax\/shareholder equity \u00d7 100%&#8221;, which is one of the few financial figures that can be used to measure the operational performance of a company&#8217;s leadership team. It represents the efficiency of the company&#8217;s profit for shareholders, and it can also be said to measure the company&#8217;s overall capital utilization efficiency. Therefore, the higher the value, the better. Since one of the chief executive\u2019s main tasks is the effective allocation of funds, the return on equity, which can be used to measure the efficiency of capital utilization, is directly linked to the effectiveness of the chief executive\u2019s allocation of funds.<\/p>\n\n\n\n<p>ROE is usually not used alone, and will definitely be looked at with other indicators (for example, the leverage ratio, various debt ratios, surpluses, changes in shareholders\u2019 equity, etc.), and it depends on the company\u2019s long-term (for example, more than 10 years).<\/p>\n\n\n\n<p>Most of the well-known blue-chip stocks in the US stock market have excellent long-term returns on equity. For example, <a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/07\/coca-cola-has-been-inferior-to-pepsi-in-and-even-return-rate-is-negative-in-past-10-years\/\" data-type=\"URL\" data-id=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/07\/coca-cola-has-been-inferior-to-pepsi-in-and-even-return-rate-is-negative-in-past-10-years\/\" target=\"_blank\" rel=\"noreferrer noopener\">the ten-year average ROE of PepsiCo (ticker: PEP) is 41.14%, and that of Coca-Cola (ticker: KO) is also 28.61%.<\/a><\/p>\n\n\n\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"The_pitfalls_on_ROE\"><\/span><strong>The pitfalls on ROE<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>If ROE suddenly changes significantly, you must pay attention to the following pitfalls:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Trap 1: Does the company use financial leverage to increase borrowing to create a higher ROE? If so, you need to carefully observe the company&#8217;s financial security indicators.<\/li>\n\n\n\n<li>Trap 2: The increase in after-tax net profit will also increase ROE. It should be noted whether the increased after-tax net profit is only a one-time profit? If so, there is nothing to be happy about, because the ROE is only temporary.<\/li>\n\n\n\n<li>Trap 3: Declining shareholders&#8217; equity (the denominator of ROE will become smaller) will also cause ROE to increase. You must pay attention to whether long-term investment losses are recognized in shareholders&#8217; equity in the current period. If it is, it is necessary to be more vigilant to avoid misjudgment.<\/li>\n\n\n\n<li>Trap 4: If the decline in ROE comes from an increase in the company\u2019s retained earnings, it is the most typical representative of a decrease in capital utilization efficiency; although an increase in retained earnings is a good thing for the company, for a growing company, it is still hoped that the company can have Good capital utilization efficiency.<\/li>\n<\/ul>\n\n\n\n<p>Most of the above content comes from the 4-2 section of my book &#8220;<a href=\"https:\/\/www.books.com.tw\/products\/0010889106?sloc=main\" target=\"_blank\" rel=\"noreferrer noopener\">The Rules of Super Growth Stocks Investing<\/a>&#8220;.<\/p>\n\n\n\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"Buffett_on_ROE\"><\/span><strong>Buffett on ROE<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>As early as 1979, in his letter to shareholders, Buffett said : &#8220;We judge the performance of a company depends on its ROE (excluding improper financial leverage or accounting), not the growth of earnings per share; unless it is a special situation (such as debt The ratio is particularly high or the significant assets held on the account have not been revalued), otherwise we believe that the return on equity should be a more reasonable indicator to measure the performance of the management team.&#8221;<\/p>\n\n\n\n<p>Buffett also mentioned in his 1979 letter to shareholders, that &#8220;In the long run, we believe that the company&#8217;s net income (including realized and unrealized capital gains and extraordinary gains and losses) divided by shareholders&#8217; equity (all investments are calculated at fair market value) The resulting ratio is the best way to measure the results of a sustainable operation, where additional capital gains may seem extraordinary in the short term, but in the long run, their impact on shareholders&#8217; interests is not as great as that of day-to-day business interests difference.&#8221;<\/p>\n\n\n\n<p>Buffett once mentioned in his 1987 shareholder letters \u201cThe Fortune study I mentioned earlier supports our view. Only 25 of the 1,000 companies met two tests of economic excellence &#8211; an average return on equity of over 20% in the ten years, 1977 through 1986, and no year worse than 15%. These business superstars were also stock market superstars: During the decade, 24 of the 25 outperformed the S&amp;P 500.\u201d A ROE value that is too low indicates that the management team has not made good use of shareholders\u2019 funds to generate income, indicating that the company\u2019s profitability is not high.<\/p>\n\n\n\n<p>Buffett once mentioned that by studying the data of Fortune Magazine in the past few decades, he summarized the financial figures and other information of the top 500 companies in the Fortune. I have always been dissatisfied that the media gives people or companies aliases or nicknames everywhere, like Buffett has long been dubbed the nickname of the god of stocks. From this incident, it can be seen that Buffett is also a person, not a god; he actually spent a lot of time and effort on basic analysis and research of enterprises that ordinary people do not want to do. I know that most people think that doing This kind of thing is stupid, but is Buffett stupid?<\/p>\n\n\n\n<p> Many people use the nickname of the &#8216;Oracle of Omaha&#8217; to deify him and believe that he has superpowers, which is just a special case, denying his amazing achievements. He doesn\u2019t have Aladdin\u2019s magic lamp, so seriously Searching for information \u2500 \u2500 Don\u2019t forget that Buffett hardly uses a computer to assist him in researching (it&#8217;s year 1987!). It takes more effort to search through paper documents. He likes to invest in the past 10 years with an average ROE of more than 20%, and there can be no companies with an average ROE of less than 15% in a year.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"195\" height=\"122\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2022\/09\/r-1600x1200-1.jpg\" alt=\"ROE\" class=\"wp-image-13800\"\/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A value that is too low indicates that the management team has not made good use of shareholders\u2019 funds to generate income, indicating that the white point is that the company\u2019s money-making efficiency is not high.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/11\/08\/5-ways-to-improve-earning\/\">5 ways to improve company earning<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/05\/10\/the-most-important-indicator-to-judge-management-team-roe\/\" target=\"_blank\" rel=\"noreferrer noopener\">ROE, the most important management indicator<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/23\/gross-margin\/\" target=\"_blank\" rel=\"noreferrer noopener\">Gross margin is a great indicator to judge the management<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>The Return On Equity (ROE) algorithm is &#8220;net profit after tax\/shareholder equity \u00d7 100%&#8221;, which is one of the few financial figures that can be used to measure the operational performance of a company&#8217;s leadership team. It represents the efficiency of the company&#8217;s profit for shareholders, and it can also be said to measure the company&#8217;s overall capital utilization efficiency. Therefore, the higher the value, the better. <\/p>\n","protected":false},"author":1,"featured_media":13800,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[654,222,174,205,206,384,176,177,11],"tags":[48,49,139,356],"class_list":["post-3543","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-roe","category-ceo","category-eps","category-fundamental-analysis","category-management-team","category-net-income","category-net-margin","category-revenue","category-buffett","tag-brk-a","tag-brk-b","tag-ko","tag-pep"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/3543","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=3543"}],"version-history":[{"count":31,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/3543\/revisions"}],"predecessor-version":[{"id":39833,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/3543\/revisions\/39833"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/13800"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=3543"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=3543"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=3543"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}