Warren Buffett’s $1 test.
Buffett has a simple investment rule on retained earnings to assess management’s capital allocation.
He discussed this concept in a 1983 letter to shareholders.
“We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained.”
This will assess whether management’s capital allocation decisions are creating value for shareholders.
“Unrestricted earnings should be retained only when there is a reasonable prospect – backed preferably by historical evidence or, when appropriate, by a thoughtful analysis of the future – that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors.”
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Some famous words of Buffett. I hope it's useful to you. : )
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whqqq : As usual for Buffet, the idea is at the foundation for investing. Simple to understand, yet so very hard to apply consistently for decades.