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Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection, + Website, 2nd Edition by Joseph Belmonte

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Chapter 6

The Return on Equity Ratio

What is the difference between the traditional accounting ROE we hear about every day and the Clean Surplus Accounting ROE?

Answer: EVERYTHING!

Note: This is the most important chapter in the book. This chapter contains the knowledge that separates you from the rest of the world. Even if you don't understand as much as you'd like to at first, the rest of the book works with this information so that you will understand everything very soon. And for your diligent efforts, you will be rewarded for the rest of your life.

What you must remember for this chapter:

  1. Book value is used interchangeably with equity (owners’ equity), even though they do not have the same definition.
  2. The return on equity (ROE) ratio is the most widely used (misused) method of comparing the operating efficiency of one company to the operating efficiency of another company.
  3. In accounting, the return portion of ROE is earnings from the income statement, and the equity portion of ROE is book value (owners’ equity) from the balance sheet.

What we will learn in this chapter:

  1. The traditional accounting ROE is an extremely inefficient method of comparing the operating efficiency of one company to the operating efficiency of another company. This ROE is extremely inconsistent from year to year for most companies.
  2. The Clean Surplus ROE is the only reliable method of comparing the operating efficiency of one company to the operating efficiency of another company. Clean Surplus smoothes ...

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