Warren Buffett prefers Free Cash Flow per Share or Owner Earnings per Share over traditional EPS because these metrics reflect the actual cash a company generates that is available to shareholders—not just accounting profits.
While EPS can be influenced by non-cash items like depreciation, accounting adjustments, or one-time gains/losses, free cash flow shows the real money left after necessary expenses and capital expenditures. This cash can be used for dividends, buybacks, or reinvestment.
Buffett believes owner earnings—essentially free cash flow tailored to the business—offer a clearer picture of a company's true profitability and long-term value creation. It helps identify businesses with durable competitive advantages and strong financial discipline.
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A company that consistently produces a high Return on Equity (ROE) is generally considered superior because it demonstrates the ability to efficiently generate profits from shareholders’ capital. High and stable ROE indicates that management is effectively using equity to grow the business and deliver strong returns without needing excessive debt or external financing.
Such consistency reflects a durable competitive advantage, disciplined capital allocation, and a strong business model. In contrast, companies with low or fluctuating ROE may struggle with inefficiencies, weak profitability, or poor financial decisions. For long-term investors, a company with consistently high ROE is often a sign of sustainable value creation and superior wealth generation.
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