1. ROE / ROIC By Brendan Mathews

2. Return on Equity Definition: ROE = One year’s earnings / Shareholder’s equity Driven by three things: 1. Profit margins 2. Asset Management 3. Leverage

3. Return on Equity ROE = [earnings / sales] * [sales / assets] * [assets / equity]

4. Return on Invested Capital ROIC = Earnings / (Equity + Debt)

5. ROE vs ROIC Business A – Started with $10,000 – Earned $1,500 in 1 st year – ROE = %15 Business B – Started with $10,000 – Earned $1,200 in 1 st year – ROE = %12

6. ROIC vs ROE Business A – Started with $10,000 – Earned $1,500 in 1 st year – ROE = %15 – Borrowed $5,000. – ROIC = %10 Business B – Started with $10,000 – Earned $1,200 in 1 st year – ROE = %12 – Zero Debt – ROIC = %12

7. Conclusion The best businesses have a high ROIC / ROE and little debt. QUESTIONS?