Building a Small Business That Warren Buffett Would Love

CHAPTER 4

Emphasizing a High Return on Equity

A business first and foremost in the realm of Warren Buffett is an investment; it is not merely a job or a means to an income, or a place to hang out as seen through the typical eyes of a small business owner. Although personal income is certainly a priority in small business, it should always be subordinated to the business as an investment in order to build a small business that Warren Buffett would love. In traversing the road from small business owner with an emphasis on income to small business owner with an emphasis on investment, it is imperative to calculate the business’s return on equity on a regular basis. Warren Buffett considers the return on equity to be his rate of return in the stocks of the companies he invests in.¹ A small business owner with a focus on return on equity can evaluate the business based on return, determine if it is generating a strong or mediocre return, make a forward-moving investment decision, and sound good in a bar, all in one fell swoop.

Painting the Picture of Return on Equity

Simply put, return on equity is a measure of how hard the equity in a business is working.

Net income can be found on the income statement and equity can be found on the balance sheet. In a small business with one owner, all of the equity technically belongs to the single owner or the single shareholder, although technically, ...