“”For capital to be truly [inflation] indexed, return on equity must rise, i.e., business earnings consistently must increase in proportion to the increase in the price level without any need for the business to add to capital – including working capital – employed. (Increased earnings produced by increased investment don’t count.) Only a few businesses come close to exhibiting this ability. And Berkshire Hathaway isn’t one of them.””
A Lesson by Warren Buffett [on Inflation], Suthen Siva
“Here is what P/E doesn’t tell you:
How much capital is required to produce a dollar in earnings? A company that needs to invest $100 to create a $1 annual earnings stream is not as valuable as a business that needs to invest only $1 to create $1 of ongoing annual earnings.
How much of those earnings convert to free cash flow? A company earns $1 in earnings and converts that into $1 of free cash flow is more valuable than a company that needs to reinvest half of its earnings just to stay in place.
What’s the return on the capital invested in the business? Higher is better, taking into account, too, the future.
What does the reinvestment opportunity look like? Does the business have the ability to reinvest its profits and what do the incremental returns on that capital look like?Q&A: Finding 100-Baggers, Chris Mayer
What does competition look like? Or how sustainable are those earnings and cash flows?”
“Google’s former HR head, Laszlo Bock, goes even further. He notes that a top Google engineer can be 100 times as productive as the median one. He writes that, “[like stock returns] individual performance also follows a power law distribution.””
The War for Talent, Kai Wu