Ch.10 · Benchmarks and Performance Evaluation · medium
What is 'return on equity' (ROE) and why do quality-focused equity fund managers track it?
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EXPLANATION
ROE = Net Profit / Shareholders' Equity × 100. A high and consistent ROE (e.g., 20%+ over many years) indicates a company efficiently generates profits from shareholder capital — a hallmark of quality businesses. Warren Buffett famously focuses on companies with sustained high ROE. Quality mutual funds specifically target high-ROE businesses as long-term portfolio holdings.
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