Manlobbi posted:
"What matters, for a really good business, is not so much what past deployed equity can produce in current earnings (ROE) but whether you can take those earnings and continue to get a high return on them (RIIC).

A pure example of the converse, a high ROE without strong RIIC opportunity, is Buffett’s purchase of Seas Chocolate. It produced huge cash flows but it couldn’t be reinvested back at the same high rate of ROE. Their expansion attempts were geographically sensitive. Nevertheless such a business can be marvelous investment, even without the high RIIC opportunity, if the cash flow can be taken out and reallocated to another business at a higher return than the business producing those earnings can achieve incrementally. That is also exactly what Buffett did of course."


Amen, AMEN, AMEN!!!!
Thank you Manlobbi for these examples and explanations. It gets at the core reason why so many folks today are Berkshire millionaires. We own a small company and while it has been a good business now for going on five decades, unfortunately our business does not provide many opportunities for re-investing profits into high ROIC situations. Thus, we invest what we can to improve the business and invest the remainder in public companies demonstrating good capital allocation skills.

Note: there are pitifully few publicly traded companies with good capital allocation skills. Buffett's long-running philosophy of bringing divisional profits back to Omaha to invest in high ROE/high ROIC investments has been the key to why we Berkshire investors have done so well over the years. Too many companies throw away money on poorly timed business expansions, ill-advised acquisitions, repurchase of their company stock at high PE valuations, and inflated C-suite pay arrangements.

Uwharrie