How Warren Buffett Calculates ROE

Warren Buffett's annual letters to the shareholders of Berkshire Hathaway are treasured by legions of his fans. These letters provide an insight into how the Oracle of Omaha goes about doing his investments. The letters also unravel his thinking process and his critical analysis of the wrong decisions he has made during the course of the year or sometimes in his investing life. Many investors, who also include some very big names in the Indian stock market, read his letters repeatedly in search of undiscovered gems in them. His 1986 annual letter had one such gem which, many investors believe, offers a glimpse of Buffett's unique thinking. In the letter Buffett explained why he does not go by the net profit mentioned in the income statement. He rather uses a slightly modified concept, which he calls owner earnings. In simple terms, this is what Buffett referred to as owner earnings: Owner earnings = Net income + Depreciation and Amortisation - Capital expenditures One can get net income and depreciation figures from the profit and loss statement. Capital expenditure can be sourced from the cash flow statement under the 'cash flow from investing activities' column. Why the modified formula? The whole id