When you look at Berkshire Hathaway’s annual reports you will often see a page that lists Berkshire Hathaway‘s acquisition criteria. Under criteria number three, it states that a company must generate a good return on equity (ROE) while employing little or no debt.
So why is ROE and low debt so important to Warren Buffett?
ROE reflects the management’s ability to allocate capital efficiently and effectively. It measures how much return is generated for every dollar of shareholder equity. A company with high ROE (>15%) means it is able effectively generate growth without need for external financing.
[Apart from ROE, here are some other crucial factors we use when analyzing a stock and the formula we use to turn a -$400,000 fund into one with over $2,200,000 in profits]
Why little or no debt?
However looking at ROE alone can be misleading; you need to compare with the debt …