There was an interesting article in Value Research Online on how Warren Buffett calculates ROE
Basically,he uses “owner’s earnings” to calculate ROE which is computed as below:
Owner earnings = Net income + Depreciation and Amortisation – Capital expenditures
The good folks at Value Research used this measure on Nifty companies and lo and behold, they found that Reliance has an ROE of -13.84% as opposed to a reported ROE of 11.92%
No doubt the heavy capex of Reliance is playing a role in having a negative ROE
But if the cash flows now don’t kick in, Mukeshbhai may well turn out to be the biggest wealth destructor India has ever seen.
