If asked to describe a successful business, most people will tell you that it is one that makes money and that’s not an unreasonable starting point, but it isn’t a good finishing point. The first rung on the ladder towards calculating investment success is calculating the return that companies make on their investments. This step, though simple seemingly, is fraught with difficulties.
First, corporate measures of profits are not only historical (instead of future targets) but are also skewed by accounting discretion and practice and year-to-year volatility. 16 billion of mistakes, reducing its spent capital and inflating its ROIC. I really do make adjustments to operating income and spent capital that reveal my view that accounting miscategorizes R&D and operating leases.
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In general, when you compare many stocks across many industries especially, the capital assessment is a far more reliable one than the equity comparison. My end results for the administrative center assessment are summarized in the picture below, where I break my global companies into three broad groups. The public market place globally, at least in the beginning of 2017, has more value destroyers than value designers, at least based on 2016 trailing earnings on capital.
The very good news is that there are almost 6000 companies that …