Mr. ROE, I suspect I know who your talking about there. Everyone wants a 'secret sauce', unfortunately there are too many moving parts in the valuation calculation to use any single metric exclusively. As to ROE, I consider more the return on what I pay for the equity, which is what Finch alluded to. If I can find 2 companies selling for $10 per share that are delivering $1.50 in EPS with growth prospects indistinguishable, then the only use I would have for ROE is to see which management has been more prudent with capital historically - for despite the number of times you hear 'past performance is no guarantee of future performance', it is actually pretty useful as a guide. Return on capital retained is also important, if a company has $1b in equity it is earning 10% on but is retaining say $50m annually and generating a 30% return on the retained capital, like Camden55's WES example, a lowish return will soon escalate. I broadly group my holdings into 3 sets. 1. Awesome businesses that I expect to hold in perpetuity, unless something meaningfully changes in the business - these are the hardest to find & are held in the largest quantity 2. The second category are more average businesses that I view as cheap, but not wonderful long-term businesses, if the value corrects & I still view the business as average, I'll probably sell. 3. Finally, sometimes assets are so clearly mispriced, even if the underlying business is a quite poor one, the downside is so clearly protected you can afford to wait. Some cross categories, but that is a very loose grouping I use. Any metric must be used with great caution, but if I was to pick one, FCF yield is a favourite, though I do own stocks with low FCF, but every case must be examined on it's own merits. I second Petepan's sentiment in being pleased to see meaningful topics discussed in a valuable way. Threads like this should be moved into a forum where beginners can learn some of the important thought processes one must use to have success as an investor - Eternalgrowth
