VNW Capital
08-28

In the long run, stock price is highly dependent on company's profitability and efficiency in using its resources. ROE both measures how a company effectively uses its resources to expand its long term profitability.

Long-Term Investing: Look at ROE or PE?
Many investors have heard the idea that “long-term compounding ≈ ROE.” This concept was first put forward by Charlie Munger, known as the Munger Rule. In his 1981 shareholder letter, Warren Buffett also pointed out that if PE remains unchanged, a company with 14% ROE will generate a long-term investment compound return of 14% as well. When picking stocks for the long run, do you focus more on ROE or PE? Why? Do you think ROIC and FCF are more important than ROE in compounding? If you could only choose one metric for a 10-year investment decision, which one would it be?
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