Why avoid companies with low ROE

Warren Buffet each year tells us in the annual report of Berkshire Hathaway, the type of companies he is looking for, one of which is “businesses earning good returns on equity while employing little or no debt.”

Companies with LOW return on equity (ROE) are best to avoid. Professor Price tells us to think of ROE as a measure of how well management is using the money (or equity) that they have.

As a shareholder, this is very important – why would you want to align your investment growth with management that only produces a low return on what they have to work with.

But companies with low ROE are very common on the ASX. For example with a healthy ROE, ABC Learning Centres was listed in 2001. Over the next few years more debt and equity was raised (and used to pay inflated prices for more child care centres in Australia and USA. ROE fell to single digits, but was not the reason the company went into liquidation, but the ROE showed this was unlikely to be a satisfactory investment.

For more information and examples of investing lessons, as well as whether  self managed super is for you, come to a free meeting – see the up-coming seminar listed above for more details. See http://ow.ly/4olRZ .


About SuperBenefitnews

Self-Managed Superannuation Service Providers in Australia. SuperBenefit provides a wholistic SMSF assistance, education and administration service continuum - 1. “assistance” is help of whatsoever nature where our overall SMSF experience and knowledge enables us to provide assistance/help without any legal (or “license”) limitations. 2. “education” involves providing knowledge through teaching, coaching and mentoring about all matters SMSF, including (but not limited to) investment issues such as equities and property, 3. “administration” encompasses all admin aspects of legally required SMSF trustee and member record keeping including (but not limited to) audit and ATO matters. In keeping with our key point that SuperBenefit does not provide Financial Advice, where issues arise from 1, 2, and/or 3 above Indicate a need for a legally authorized provider (such as a Financial Adviser) and the client does not have their own service provider, the client can utilize SuperBenefit’s ‘Connect Assist’ … SuperBenefit, in itself, does not provide Financial Advice, but it does provide the wherewithal for great SMSF service. WE do not provide Financial Advice or any other service that requires a legally authorized provider. However, where such advice or service is required we have our ‘Connect Assist’, a SuperBenefit resource we use to connect clients to a Licensed Advisor or other legally authorised service provider. Call us 0407 361 596, no obligation FREE Connection call to see how we can help you!
This entry was posted in Investing - Stock Fundamentals, SMSF Investing, SMSF Seminars. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s