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Buffet's requirement to be capital efficient: ratios

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The best investor of all time, Warren Buffet, talks about investing in "capital efficient" businesses. Coca Cola falls into this category since it generates great sums of cash with minimal investment in capital. It also pays dividends. The story goes Buffet purchased a "gazillion" shares of coke in the crash of '87 and despite shares tripling in value since then he has never sold a share.

How is this "capital efficient" concept related to the ratios in this discussion? Which ones would signal "buy to Buffet" and why?

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Capital efficient means that the earnings, compared to the investment required to generate the earnings, are strong. So, the ratio of interest for studying capital efficiency is return on equity. Why? Equity is the money that owners have had to part with to get the earnings. From the owner's point of view, that is the only "investment"? of interest. There are other ratios that relate to return ...

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Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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