A Word From One Investor To Another - Based On Techniques And Wisdom Provided By The World's Most Famous And Successful Investor Warren Buffett by Manan Shroff

Author:Manan Shroff
Language: eng
Format: epub
Tags: invest like warren buffett, how to value a company, create your own mutual fund, value investing, book on stock investment, how to invest in a stock market, beginner guide to invest in stock markets
Publisher: Krishna Publications Inc
Published: 2018-07-08T16:00:00+00:00

Current Price

$131

$186

$35

To receive 12% return

(Maximum Price You Should Pay)

$166.45

$336.05

$36.14

Actual Return

(Based on the Current Price)

14.71%

18.82%

12.36%

Return on 10,000

(at 12%)

$31058

$31058

$31058

Return on 10,000

(Based on Actual Return)

$39447

$56091

$32071

11. Calculate The Return on Retained Earnings

The return on retained earnings usually gives us an idea about the effectiveness of management in allocating the retained earnings produced by the company. In simple terms, the retained earnings are the net profits retained by the company to grow its own business or to acquire a new business rather than paying dividends to its shareholders.

According to Warren Buffett: “Unrestricted earnings should be retained only where there is a reasonable prospect – backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future – that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors.” In other words, every $1 dollar retained by the company shall at least produce $1 of market value. We will examine Visa, Apple and Pfizer management effectiveness using the previous 5 years of data in this chapter.

Visa

Between 2013 and 2017, Visa had total earnings in the amount of $11.71 per share. During the same period, Visa paid out dividends to shareholders totaling $2.54/share. Consequently, Visa retained earnings of $9.17 ($11.71 - $2.54). On December 29, 2017, Visa closed at $114.02. At the end of 2013, Visa’s closing price was $55.67. So, in the past 5 years, Visa retained $9.17, which has created market value in amount of $58.35 ($114.02 - $55.67). Thus, every dollar retained by Visa has created the market value of $6.36 ($58.35/$9.17). This is excellent performance by Visa’s management. Remember, according to Warren Buffett, every dollar retained by a company shall produce at least $1 of market value. Visa has produced $6.36 of market value for every dollar retained.

We can also calculate the rate of return on retained earnings. During this 5-year period, Visa has grown its earnings per share from $1.73 in 2013 to $3.10 by the end of 2017. That means Visa produced the increment earning in the amount of $1.37 ($3.10 - $1.73), utilizing the $9.17 in retained earnings. Therefore, the rate of return on retained earnings should be 14.94% ($1.37/$9.17*100).

Visa (2013-2017)

2013

2014

2015

2016

2017

Total

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