Back to basics about free cash flow
Accounting is but an aid to business thinking, never a substitute for it
economic performance
How to distinguish a superb value creator from an also ran
The best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return
Profound errors in interpreting and using ROE and ROC
I find it better to analyze a company’s cash flows, maintenance capex, growth capex and free cash flow in real dollar terms and measure them against the true value of the capital management has use of
The hunt for wonderful businesses
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.
Be wary of using Return on Capital (ROC)
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.
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