What is the return on equity? In layman's terms, it is how much return the net assets invested by the company can bring. Its English abbreviation is ROE, and its calculation formula is ROE= net profit/net assets. For example, if you invest 1 yuan to earn 0.2 yuan, then its return on equity is 0.2/ 1=20%.
0 1 Who is the most important? Has the return on equity been generated? Yes, but not all, and not the most important.
1990, Buffett said in a speech at Stanford Business School: "The enterprises that people really expect are those that can operate without providing any capital. Because it turns out that money will not give anyone an advantage in the competition with this enterprise, and such an enterprise is a great enterprise. "
In other words, in an ideal state, "an enterprise that can survive without any investment" can be called a great enterprise. In the face of such enterprises, no amount of money is useless, and money completely returns to the essence of "a piece of paper". This is a bit like the position of money in front of the earth: the world goes around without money.
Therefore, the focus of ROE is not the amount of book assets in financial statements, but other assets (hidden assets) that are not reflected in company statements. For example, Apple has Steve Jobs' brain, and Tesla has a golden signboard ... If high ROE can only be achieved by money, whoever has more money will be more powerful, which obviously doesn't make sense.
The high rate of return on net assets is not because of how high the book net assets can be generated, but because other assets are playing a role, which are not recorded in the book assets, or can not be reflected in the financial statements. The low rate of return on net assets indicates that some of the company's net assets are damaged, which makes it unable to play its value.
Buffett specially created a concept-economic goodwill-to describe "assets that are not recorded in net assets, but can actually bring profits to enterprises."
For example, if you open a restaurant, your net assets include tables, chairs and so on, but if you want to prosper, you can't rely on these, you can only rely on the chef's skills. This can't be recorded in the assets, but it does bring huge profits to the restaurant. The chef's craft is "economic goodwill".
There will be two questions here: what is the standard of return on net assets? Why is there such a standard? Let's talk about the latter question first.
Marx wrote in Das Kapital: "If there is 20% profit, capital will be ready to move;" If there is a 50% profit, capital will take risks; If there is a profit of 100%, capital dares to take the risk of strangulation; If there is 300% profit, capital dares to trample on all the laws in the world. "
Profit-seeking is the nature of capital. Where there are rich profits, there will be more capital influx. When enough capital flows in, the rate of return will inevitably fall until the rate of return tends to be consistent. In other words, the rate of return that the asset itself can bring is actually the same, otherwise there will be arbitrage.
What is the rate of return that capital itself can bring? It is a risk-free rate of return, which can take the yield of national debt, AAA bonds or bank guaranteed wealth management products. Money can only do so much. ROE exceeding risk-free rate of return can be called high; On the contrary, it is low.
The rate of return on net assets of a formula does not depend on the amount of book net assets, but on hidden assets. This is the core reason why Buffett takes such a fancy to the "return on net assets" index. We can use a formula to describe it:
(net assets A+ economic goodwill B)* constant C= net profit = net assets A * return on net assets
In other words, net assets and economic goodwill jointly contribute to the company's net profit, and then jointly produce the return on net assets. Then, the corresponding relationship between economic goodwill B and ROE is:
Economic goodwill B=(ROE/ constant c? -1)* Net assets a
When the return on net assets is greater than the constant c, the economic goodwill is positive, so the enterprise has hidden assets that are not recorded in the financial statements; When ROE is less than the risk-free rate of return c, some of the net assets of the enterprise do not play their due value. Even the income generated by the assets themselves can't be reached, and Buffett certainly won't choose such a company to invest.