How to identify companies that make lots of money for shareholders
Economic performance focuses on effective use of the capital invested in the company
return on invested capital
The awkward link between Buffett’s moats and ROIC – Part ll
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.
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.
Cash flow absurdity and Warren Buffett’s Owner Earnings
Most analysts will talk of EBITDA, EBIT, NOPAT and what not. Warren Buffett’s approach is to think in terms of Owner Earnings. It is somewhat akin to free cash flow.
Moats, ROIC and the problematic Cost of Equity
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.
Buffett moats and the secret sauce of pricing power
Some companies are in the seemingly fortunate position that they can maintain profit margins simply by raising prices
The awkward link between Buffett’s moats and ROIC – Part l
Growth benefits investors only when the business in point can invest at incremental returns that are enticing
Problems with the most popular indicator of superb companies
From its growing operating cash flow, it is able to fund growing capital spending and also fund growing R&D expenditures. Of note, it seems to be able to maintain and even improve its operating margins. It is easily able to fund the capex needed to maintain it long-term competitive position in its various markets. It is also easily able to fund the capex it chooses to make to grow the company and fund healthy R&D expenditures.
Value investing in the age of the Magnificent Seven, networks, intangibles, AI and all that
A high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a ‘value’ purchase.
Investment in intangibles has wreaked havoc on the meaning of multiples
The majority of investments are in intangible assets, including research and development, customer acquisition costs and branding. But companies commonly expense these investments on the income statement as they incur them.
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