Economic performance focuses on effective use of the capital invested in the company
No company under consideration will even be close to scrambling to pay its creditors.
There needs to be a skilled knight in the castle to protect and enhance the moat.
Some companies are in the seemingly fortunate position that they can maintain profit margins simply by raising prices.
Buffett uses Owner Earnings to judge the performance of a company and its management. He also uses Owner Earnings to assess the intrinsic value of a company.
Free cash flow yield can be a better indicator when return on capital (ROC) becomes a vanity metric that unduly flatters economic performance and management. We can charge management with the full cost of Economic Goodwill.
Superb companies produce a very high return on capital. But when substantial intangible assets don’t show up on balance sheets, the ROC numbers are unduly flattering to management.
Book Value – Ain’t what it used to be – With the rise of company investment in intangibles, book value is losing its relevance.
Something over 80% of the market capitalization of the S&P 500 is made up of intangibles. Only a fraction of that appears on balance sheets.