Does your business have favorable long-term prospects?Warren Buffett along with other successful investors see the economic world as being divided into franchises and commodity businesses. To establish a franchise you must have the ability to move flexibly without being regulated too much by the government, it has to be needed by the public, and there is no close substitute. This doesn’t mean that there aren’t any other businesses out there like yours, but none that can offer what you have to offer. This will require some thinking.
Does your business get to the point and make sense?What is it that you have to offer and will the public see it easily enough to grasp on to it? Do ordinary things exceptionally well.
Does your management resist making necessary changes?Will the leaders of the company be willing to go in a different direction then what they have expected? Will his fellow employees and support team be there to find out what a change will mean and what the return will be? There has to be enough projects and workers to fill expansion of business at the proper time to keep a continuous flow. The company will be innovative enough to come up with their own ideas instead of having to copy what other peers perform out there.
Does your business have a consistent operating history?The best overall production comes from companies that have settled into a niche. Now this doesn’t mean that they are complacent with where they are at, but have experience with successful operation systems that are manageable and make sense to the employees as much as it does to the owners.
Is the management you have rational with its capital?A rational business owner with an excess amount of capital will only be responsible by taking the course of returning that money to shareholders by raising the dividend, or buying back shares. This is specifically for when you are giving an average return to your investors to being with.
Does the management find their success in Return On Equity?Warren Buffet said, “The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the consistent gains in earnings per share.” This is vital because so many owners are confused how to measure their growth and how important it is that they pay out to their employees.
Is management honest and open with the shareholders?Three questions always need to be public to your shareholders1. What is the worth of the company?
2. Will the company be able to achieve the goals that it has set out to accomplish (so important with stock)
3. What are the managers doing to overcome trials and to improve it?
If a shareholder can understand that a company is going in a good direction and that it is taken care of no matter what happens then you will always have smiles.
What is the rate of your “owner earnings”?Buffett prefers to modify the cash flow ratio to what he calls “owner earnings”. The equation is based on the company’s net income plus amortization, depreciation, and depletion minus the amount of capital expenditures and any additional working capital that might be necessary. Owner earnings are not precise and calculating future capital expenditures requires rough estimates that can vary. This is will give you a good idea of how your company is really doing and give you an idea of the direction that you may be going.
Is there a high profit margin with your company?Buffett’s explains that managers of high-cost operations continually add to overhead, whereas managers of low-cost operations naturally always finding ways to cut expenses. The more efficient that you are with your spending then the better chance you have of getting an investor. This is their precious money and they need make sure that it isn‘t going to be used foolishly.
How do you find the value of your business?If you want to know what it takes to determine the value then you look at the stock market. Buffett tells us the value of a business is determined by the net cash flows expected to occur over the life of the business, discounted at an appropriate interest rate, and he uses the rate of the long-term U.S. government bond. This gives him or any other investor a good idea of the future value according to the economy.Reference to Robert Hagstrom’s book The Warren Buffett Way, John Wiley & Sons Inc., New York, 1994.
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