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How to evaluate a CEO’s capital allocation skills

Read below excerpts from Warren Buffet’s share holder letters

Over time, the skill with which a company’s managers allocate capital has an enormous impact on the enterprise’s value.

The lack of skill that many CEOs have at capital allocation is no small matter: After ten yearson the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business.

 

Now pause and reflect, how often financial pundits talk about capital allocation skills of a manager when they are evaluating a CEO or MD of a company, not often. In fact a lot of reported results and press releases focus on earnings and sales, while the crucial capital allocation decision and their consequences are missed.

In this post we would learn through an example on how you can assess a management’s capital allocation skill though reported numbers. This post is largely built on a superb paper written by Michael J. Mauboussin in August 2014, download a copy from here

To evaluate capital allocation of any firm’s manager, you need to focus on following things

  1. Sources and Uses of
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