Can you trust the mother of all ratios?

The return on equity ratio is highly favoured by professional stock pickers. It helps gauge a firm's profitability relative to size. But can you trust it? Tim Bennett explains.

Last Friday, Barclays' chief executive Bob Diamond warned that the bank might miss its 13% return on equity (ROE) target. Meanwhile, Credit Suisse has been explaining why it delivered an ROE of 6% in 2011, when its target is nearer 15%. And ROE is also one of US investor Warren Buffett's preferred numbers for analysing investments. The Financial Times even calls it the "mother of all ratios". But is it as useful as its fans claim?

Capturing bang per buck

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Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.