A company that spends a lot of R&D dollars on intangibles of lasting value will have assets not shown on the balance sheet and ROIC will be artificially inflated. Such a company that is also acquisitive will show depressed ROIC because NOPAT will be reduces because the investments in intangibles of lasting value will be expensed and depress earnings and hence NOPAT.
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.
If the CAPM is flawed, what can replace it? The best approach would be to assess whether companies in general and relatively speaking, the company in question, can raise money cheaply in public offerings.
Some companies are in the seemingly fortunate position that they can maintain profit margins simply by raising prices
Growth benefits investors only when the business in point can invest at incremental returns that are enticing
Asking ourselves questions in a simple framework based on Michael Porter’s five competitive forces allows us to understand what makes Warren Buffett’s moats work and where they are likely to break down.
Management that unfailingly thinks and behaves like an owner of the business and has the courage and candor to discuss failures openly in reports to shareholders.
When investing, we view ourselves as business analysts – not as market analysts, not as macroeconomic analysts, and not even as security analysts
If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never
Clearly it is not a moaty Warren Buffett enterprise. But, over the next five years or so it has the potential to become one.
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