Tag Archives: warren buffett on return on equity capital

Warren Buffett’s thoughts on record earnings

dollarbillsfreeIn his letter to Berkshire Hathaway’s stockholders as far back as March 14, 1978 for FY2007, Warren Buffett has this to say about record earnings: “Most companies define “record” earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding.”

This statement is worth repeating and highlighting: “After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding.”

What then is a more appropriate measure of managerial economic performance?

Here is Warren Buffett’s answer in the same letter to Berkshire Hathaway shareholders: “Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital.”

Recommended reading:

(1) The Essays of Warren Buffett: Lessons for Corporate America, Third Edition

(2) Berkshire Hathaway Letters to Shareholders, 1965-2013