QUOTE(yok70 @ Feb 27 2011, 12:53 AM)
Great read of your info. Thanks!
I remember read from somewhere saying Buffet prefer ROE to any other measuring method (be it ROI or EPS etc.).
I'd love to hear your thoughts (or from any other forumers) regarding it. Especially on the ROE vs. ROI case.
Thanks again!
I think Buffett look at all of those. The differences between ROI, ROIC verus ROE stems from the type of return there are measuring. For ROI and ROIC, it incorporates both debt financing (e.g. banks and bond holders) and equity financing (e.g. stock holders like us), so it measures the total return of company in utilizing both type of financing. For ROE, it measures the return on equity financing only. The problem with ROE may be that, since it disregard debt financing, companies may generate extraordinary ROE by taking a lot of leverage. So, ROIC may be a better measure if companies employs a lot of leverage. Take the private equity firm Blackstone as an example, their ROE is impressive but if you look at the leverage, then it is a bit scary. Even Olam, the Singapore-based commodities trader, my school professor like them a lot and use it as a case study of good companies, I tell my prof that this company is doing crazy stuff and if things goes bad, can easily collapse. If you look at their leverage and what they are trying to do, you will understand why I say so. Or back to Malaysia, we look at Parkson, their ROE is pretty decent, above 20+% if I am not mistaken, but, if you look carefully, a lot of their assets is not stated on the balance sheet through the use of operating leases, so their ROE is actually overstated. If you bring those things back to balance sheet, their ROE is still very high, but it is achieve through the use of leverage rather than via operations.
So, at times, ROE may not give a good measure of a business if there is a lot of leverage. Using ROIC and ROI will allow users to easily compare across industry as it is not affected by their financing decision (e.g. how much debt a company holds). A Chinaman company with a lot of cash may looks bad when compared to a modern firm using some advanced but questionable theory like optimal capital structure. But, when compare based on ROIC and ROI, this Chinaman company may be better than all these so-called modern firms. This Chinaman company survive better during a crisis too. If Genting Malaysia were to leverage its balance sheet crazily like what Las Vegas Sands did, GENM would have one of the most impressive ROE in the world. At the peak before the crisis, it took LVS $7 dollars of debt to generate $1 dollars of revenue. LVS runs into trouble during crisis, but, they manage to take care of their debt. They could easily went bankrupt if not for their wealthy majority owner pump money into the company. But, that's was history, people already forgotten about that. Those who bought at the depth of the crisis would have made 20x their money buying LVS, but, hindsight is always 20/20.
Feb 26 2011, 01:14 PM
but its a convenient one stop reading area.
but fundamental pov is quite subjective here 
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Good for both of us as well as others who bought Tanco......2nd round of profit. 
.......hopefully a 3rd round will come too. 
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