Determining the Earning Capacity of a Company (Now Really, Can It Be This Easy?)
Value Is Determined by the Creation of Wealth
The most important concept in investing is to determine which companies are most efficient at using their asset base to earn profits for us, the shareholders. Earning profits should not be a short-term fad. Profits should be examined as to the level of the return on assets and the consistency of those returns. In other words, an efficient company can earn more with a certain asset base than the competition, and the most efficient company can do so consistently year after year after year.
Profits should be examined as to the level of return on assets and the consistency of those returns.
Remember that little lemonade stand you set up in front of your house? Then one day your competition set one up right across the street. Somehow, you had to come up with a method in order to be more efficient than the competition. After all, if you were more efficient, you could price your product lower than the competition and still generate the same or greater profit.
Possibly you had a better and more efficient lemon squeezer (like mom), which would net you more juice per lemon. Maybe you had a competitive advantage in that you were set up under the only shady maple tree on the street. People wanted to stop at your stand because it was 100 degrees in the sun and you had the monopoly on shade. Maybe you allowed your workers (little brother and sister) to share ...