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Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: Robert Douglas who wrote (330)	9/23/1998 2:32:00 PM
From: cfimx	Read Replies (1) \| Respond to of 4691

>>>For a business to increase earnings "WELL in excess of revenue growth" each year you have to increase the amount of each dollar brought down to net earnings. <<< A company dosen't HAVE to do it YOUR way Robert. In fact, Berkshire Hathaway didn't do it this way. But lets focus on G. What if G simply maintained their margins over the next ten years and grew revenues at 4% annually? Suppose that to grow at 4%, they didn't have to spend all their earnings on cap ex, and thus were able to generate some excess cash each year. G is a Buffet business right? These kind of businesses are known to do stuff like that, yes? Well the build up of cash over the years has to go SOMEWHERE, doesn't it? Would not G be able to grow income at a greater rate than revenue if they just earned the risk free rate on those funds that were building up on the balance sheet? Wouldn't that make income grow faster than revenue Robert? Suppose they were able to buy a business like Duracell that could earn MUCH MORE than G earned with their Tbills. That might even be a prescription for earnings growing WELL in excess of revenue growth. You see, it is the deployment of this free cash flow over time that allows a company like G to grow the bottom line faster than the top line. I don't think its at all dependent on expanding margins, though a great company often does that too, as you pointed out. To bring it down to the personal, I could keep earning the same amount of salary year after year after year, but as long as I saved some of it, I woud be able to increase my total income every year. Why? My salary (luckily), like G's ongoing revenue, is just one source of income. Because I can take the SAVINGS from my salary, and deploy that into stocks, bonds, real estate, or an income producing business. MY total income goes up, but my salary never increases. I didn't have to increase my "margin" to get richer. I just had to make sure I generated some "free cash" (save some of my salary), and be "smart" about deploying it (keep it out from under the mattress. >>In 1988 Gillette brought down 7.5 cents to the bottom line for each dollar of sales. During the next decade this number has grown to an estimated 16 cents in 1998. What you are suggesting is that this will keep growing indefinitely<< by the way, I don't think I ever suggested this at all.