dried food! This article will take you to understand the key indicator for Buffett's stock selection, ROE. Even novices can play with the stock market. Someone once asked Buffett, if you could only use one indicator to invest, what would you choose? Buffett replied, "If I had to use a single indicator for stock selection, I would choose ROE (Return on Equity). Companies with ROE that can remain stable at 20% or above in the long run are good companies, and investors should consider buying them. ROE stands for Return on Equity Formula: Return on Equity (ROE)=Net Profit ÷ Net Assets (Ownership Equity | Shareholders' Equity) x 100% This data is a very classic data, which reflects the return on investment of a company's shareholder equity and is an important indicator for evaluating the financial status of shareholder equity. This data is a straightforward way to tell you how much net profit shareholders can earn for every dollar of capital invested. Having a lot of net assets is useless. It is only useful if it can bring net profits. As the old saying goes, quantity is not as good as quality. All assets, liabilities, and so on of a company are for making money, and being able to make money is a good company. The higher the return on equity, the stronger the profitability, indicating that investors have high-quality assets. The return on equity can be further broken down in more detail as follows: Return on equity=(net profit ÷ sales revenue) x (sales revenue ÷ average total assets) x (average total assets ÷ net assets) Net profit ÷ Sales revenue (i.e. the net profit margin of the product) Sales revenue ÷ average total assets (i.e. total asset turnover ratio) Average total assets ÷ net assets (i.e. leverage ratio) Through this three-dimensional data, we can have a clearer understanding of the situation of the enterprise, whether it relies on product profits, product turnover, or leverage to make money. Enterprises must have a unique feature in order to make money, which is either huge product profits, extremely fast asset turnover, or leveraging more resources. There is no good or bad in any of the three modes. It is good to sustain the operation and make money. The most important thing for a company is self consistency. Different business models have different focuses If it is the first way to make money from product profits, you need to pay attention to the profit of the product. If you make money from turnover, you need to prevent a decrease in turnover later on Those who play with leverage should pay attention to the cost and risk of leverage By understanding the type of enterprise and focusing on these changes, you can understand how the enterprise is operating, rather than applying data from other models to different models of enterprises. Financial analysis requires flexible application and is definitely not rigidly based on data. If we have to say which model is the most stable, it must rely on the profit of the product to make money steadily, because the second type of turnover to make money requires the ability of the enterprise to operate, and the third type of leverage to make money is likely to be damaged by leverage. ROE (Return on Equity) is the most important indicator for truly measuring a company's profitability. ROE=net profit margin on sales x asset turnover x equity multiplier Selling net profit margin tests your ability; Asset turnover rate tests your speed; Equity multiplier tests your courage. So, which path do you choose to take? Are you making money through ability, speed, or courage? Many people have put in a lot of effort on one of the paths, and it's already very impressive. If you can do very well on all three paths, congratulations. If you are still a startup today, you must think carefully about which path to build your core competencies on. Use DuPont analysis to identify your success factors. I hope it can give some inspiration to my brothers.