how does he think about earnings

8/3/2019 How Does HE Think About Earnings

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How Does HE think

about Earnings?


2/43

Owner earnings represent (a)

reported earnings plus (b)

depreciation, depletion,

amortization, and certain

other non-cash charges

less (c) the average annual

amount of capitalized

expenditures for plant and

equipment, etc. that the

business requires to fullymaintain its long-term

competitive position and its

unit volume. If the business

requires additional working

capital to maintain itscompetitive position and unit

volume, the increment also

should be included in (c).


3/43

Our owner-earnings equation

does not yield the

deceptively precise figures

provided by GAAP, since (c)

must be a guess - and onesometimes very difficult to

make. Despite this problem,

we consider the owner

earnings figure, not the

GAAP figure, to be the

relevant item for valuation

purposes - both for

investors in buying stocks

and for managers in buying

entire businesses. We agree

with Keynes's observation:I would rather be vaguely

right than precisely

wrong.


4/43

Calculations of this sort

usually do not provide

pleasant news. Most

managers probably will

acknowledge that they needto spend something more

than (b) on their

businesses over the longer

term just to hold their

ground in terms of bothunit volume and competitive

position. When this

imperative exists - that

is, when (c) exceeds (b) -

GAAP earnings overstateowner earnings.Frequently

this overstatement is

substantial.


5/43

In many businesses

particularly those that

have high asset/profit

ratios - inflation causes

some or all of the

reported earnings to

become ersatz [fake,

artificial, unreal]. Theersatz portion - lets

call these earnings

restricted - cannot, if

the business is to retain

its economic position, be

distributed as dividends.


6/43

Were these earnings

to be paid out, the

business would lose

ground in one or more

of the following

areas:

its ability tomaintain its unit

volume of sales,

its long-term

competitive position,its financial

strength.


7/43

No matter how

conservative its

payout ratio, a

company that

consistently

distributesrestricted earnings

is destined for

oblivion unlessequity capital is

otherwise infused.


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Buffett uses the concept of Onwer

Earnings instead of Free Cash

Flow


12/43

HE uses Owner

Earnings todetermine

attractiveness

of a BUSINESS

as well as

INVESTMENT


13/43

Value is

destroyed, notcreated, by any

business that

loses money over

its lifetime, no

matter how high

its interim

valuation mayget.


14/43

Common stocks sell partly as iftheyre bonds with an uncertain coupon

meaning theyre tied to economic

reality. They partly sell based on a

reasonable projection of the cash

thats going to come out of them sooner

or late. But partly they also sell like

Rembrandts. They sell like a separatecategory that has gone up for a long

time in the past which results in the

creation of an investment fashion. And

to the extent they sell like Rembrandts

and more and more people purchase

Rembrandts because buying Rembrandts

worked for Rembrandt owners in the

past, you get valuations that have no

anchor in reality in terms of

expectancies of future cash flows. -

Charlie Munger


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Market Cap (Rs. Cr.)

Stock Price

15 Nov 01 to 14 Nov 11


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Sutle River

NJHPS: Nathpa Jhakri Hydro

Power Station is Indias Largest(1,500 MW) Hydro Electric Power

Station


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A 62.5 meters high concrete Dam at

Nathpa to divert water through four

intakes


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An underground De-silting Complex which

is one of the largest underground

complex for the generation of hydropowerin the World.


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A 27 km long Head Race Tunnel,

which is one of the longest

hydro power tunnels in the World


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An underground Power House having six

Francis Turbine Units of 250 MW each


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how does he think about earnings

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