Hope all is well.
I've been reading through the 1985 Warren Buffett letter and came across a paragraph that I want to research further.
"In 1985 they earned an aggregate of $72 million pre-tax. Fifteen years ago, before we had acquired any of them, their aggregate earnings were about $8 million pre-tax.
While an increase in earnings from $8million to $72million sounds terrific - and usually is - you should not automatically assume that to be the case. You must first make sure that earnings were not severely depressed in the base year. If they were instead substantial in relation to the capital employed, an even more important point must be examined: how much additional capital was required to produce the additional earnings?"
So what I'd like to know is how would one examine this? What ratio should one use. Is it return on equity? Return on capital employed?