How to calculate Return on Equity?

[Snoopy]

What other methods available to do similar valuation?

Hold on! I wouldn't give up on ROE just yet.

I stand by everything I said about 'the market' reducing your return to well below ROE from an investor perspective by bidding up the price of shares to more than they are 'nominally worth', thus reducing your return for any new shares you buy 'on market'.

But there is still one thing you can do with ROE to 'beat the market'. You have to look for a company with high ROE that does not pay all of its income out as dividends. Why? Because if they can.

1/ Retain some shareholder equity AND
2/ invest that new equity at an historic high rate

(NOTE: these are two pretty big 'ifs')

then the effect of that new bit of equity is often *not* arbitraged away by Mr Market, if you consider a long term time horizon. This is exactly Warren Buffett's strategy as espoused by Mary Buffett.

Effectively Warren considers buying a company on his ten year time horizon, as buying a (roughly) fixed rate of return investment (if you select your company carefully) with what Warren terms an 'expanding coupon' caused by the 'new retained earnings' growing the incrementally expanding business at well above treasury bond rates.

That means that 'high ROE' is not a sufficient criterion for the likes of Warren to make an investment. Warren also requires the company he is considering to be able to retain some of that ROE and invest it wisely. The general market will very likely steer clear of bidding up these investments because in a classical sense this can involve buying a share with a very high PE ratio, which with a one or two year time horizon looks hard to justify. To the likes of Warren however, such an investment can make perfect sense.

SNOOPY