These guys have been making sugar water for 150 years In the early days their

These guys have been making sugar water for 150 years

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Think about Coke again. These guys have been making sugar water for 150 years. In the early days their product was unique, but over the years science has advanced and now there are colas on the market that taste quite a lot like Coke, some would say exactly like Coke. But Coke still owns half the market and charges a premium price. How? Because they have such a strong brand that you don’t think “I want a cola.” You think, “I want a Coke.” There are five kinds of big Moats, any one of which can give you that kind of durability: Brand, Secret, Toll, Switching, and Low Cost (see sidebar for definitions). Whole Foods is going for a Secret Moat with secrets about how to manage perishables from farmer to customer better than anyone in the world. And from that success, they’re building a Brand Moat. Coke has a Secret Moat with its formula, a Switching Moat with its distribution system, and a Brand Moat that’s so strong it’s become a Toll Bridge: you want a Coke, you have to buy a Coke—nothing else will do. Big-Moat businesses have numbers to back up the Moat, which in Rule #1 I call the Big Five plus Debt. If a business has a big Moat, these numbers, as a group, are usually consistently high over long periods of time. With consistent financial numbers and a durable product, we can make a reasonably educated guess about what kind of cash this business will earn you well into the future.
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The Big Five Numbers plus Debt are as follows: ROIC: Return on Invested Capital (also called Return on Capital, ROC) is the amount of money that the business makes each year on the capital it has to invest. ROIC should be 10 percent or better. The Four Growth Rates: earnings, sales, equity, and cash should all be growing at 10 percent or better. Debt: Zero is best but in any case not more than can be paid off in three years of earnings. For research on the Big Five Numbers, we’re going to need long-term financial information. Yahoo! only goes back five years. We want ten years, so I’m going to send you to MSN.com . Click on Money. Let’s take a look at Polo Ralph Lauren. Type “RL” in the symbol box and hit enter. The left column has a list of menu items. About halfway down, under Fundamentals, is Financial Results. Click it. A button for Key Ratios will appear. Click that. Now, in the center of the page is a menu with seven items, starting with Growth Rate. The fifth item on the list is Investment Returns. Click that. We’re going to look at the most important number of all—Return on Invested Capital, aka Return on Capital.
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Throughout the book, I’ll be showing you corporate financial information so you can learn how to use this data. It doesn’t matter that this data is outdated or changed. It’s the way you use the data that is important, and that’s what this book is about. Return on Capital is 13.9 percent. Excellent. Over the last five years it’s averaged 12.7 percent. Even more excellent. I love the consistency. The consistency and size of the ROIC is hugely important—consistency because it tells us the CEO is investing shareholder money well and growing the business. He’s giving shareholders a 13 percent return on
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  • Spring '20
  • Warren Buffett

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