A key measure of management performance is gained from a review of a company's Return on Equity in Section 2 of the Stock Selection Guide, letting you know how much money a company makes in profits based on its net worth.
While the traditional formula used to calculate ROE is Net Income ÷ Shareholder's Equity, the SSG and Toolkit 6 use Earnings per Share ÷ Book Value per Share, which are the rough equivalents of the values used in the original formula.
Look for companies with stable or growing annual ROE in Section 2 of the Stock Study form, and compare their five-year averages to the companies' industry groups and peers to see if these businesses are leaders or laggards.
Toolkit 6 offers advanced features to help make these figures even more meaningful. Click the magenta-outlined box around the five-year average ROE to display a pop-up graph of results, which can help you see trends more clearly:
In Preferences, you can set the value used for the Equity component of the calculation to use Beginning of Year Equity (the default), End of Year Equity (the method used on the paper SSG), or the Average of the year-end and beginning year values (used in many academic textbooks).
Note that the preferred "beginning year" method uses the book value reported in the data service for the end of the prior fiscal year; this causes the ROE for the oldest year of the company's history to be blank. The "beginning year" method makes sense if you think of it as a measure of how much profit the company management was able to earn in an entire year compared to the shareholders' assets at their disposal at the start of that year.
Also, it's important to remember that ROE can be affected by how much a company relies on debt to finance its growth. When a firm borrows money, the equity portion of ROE shrinks, thus increasing the ROE value. That's fine as long as the company can manage its debt load.