3 So how many years does it take to double one time if we have two doubles in

3 so how many years does it take to double one time

This preview shows page 79 - 82 out of 263 pages.

3. So how many years does it take to double one time if we have two doubles in five years? Divide 5 by 2. That’s a double every 2.5 years. 4. Now we use the Rule of 72, which says if you know the number of years it takes to double once , divide the years into 72 and you get the growth rate. So now divide 2.5 into 72 and you get 29 percent for the EPS growth rate. I always try to do the dividing in my head, so I just ask myself what 2.5 goes into easily that’s close to 72. Answer: 75 (25 goes into 75 three times). So 2.5 goes thirty times. And it’s not 75, it’s 72 and I rounded up for the 2.5, so I’m going to ballpark this at 26 percent. Close enough. So let’s review our four growth numbers. BVPS is 15 percent, EPS is 18 percent, Sales is 12 percent, and Cash is 26 percent. And 15, 18, 12, and 26 are all good. All are past 10 percent and going up. Actually, let’s see if they are. Let’s put the numbers on a graph using Excel Charts. (If you want to see how to do this, go to PaybackTimeBook.com and look at more exercises in the online addendum for this chapter.) Cash is starting to decline after a fast run-up, but at a 26 percent growth rate, that’s to be expected. And with the recession that started in 2008, I’d expect to see these numbers headed south.
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Now check the debt. Especially considering all the problems businesses are having getting credit these days, let’s be sure we’re buying companies that have their debt covered. That means they can pay it off in three years or less from earnings. Go to Company Report on the RL Main Menu and you’ll see RL’s Interim Trailing Twelve Months of Earnings: RL produced $465 million in the last twelve months. Now look up the current debt. To get that number go to the Balance Sheet and click Interim so you get the most recent quarter’s Balance Sheet. Balance Sheet numbers are not like Income and Cash numbers.
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Income and Cash numbers accumulate through the year, so one quarter of Cash is not the same as a year of Cash. But the Balance Sheet numbers are always accurate for the entire business right up to the date of the Balance Sheet. So Debt for the third quarter is the total company obligation, not just a piece of it. Debt is about $420 million. Divide debt by earnings, and you get 1. So debt can be paid off in about one year from earnings. Check. In general, what we’re looking at here is a well-run company that’s been doing a good job achieving consistent growth but is going flat because of the recession. This looks like some sort of Moat to me, and also like opportunity. One way to think about this is to ask yourself: If it has Moat, will it fare better than its competitors and emerge from recession even stronger? And can I buy it cheap because of the recession? More on that in the next chapter . First, it’s time to find out about the people who are running it. MANAGEMENT With Meaning and Moat checked off, a business is pretty certain of making money in the long term … if Management doesn’t screw it up. If our great business isn’t being run by a traitor and for his own benefit, not for the benefit of the owners (us), the employees (also us
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