Warren BuffettAnalytical perspectiveWB-P01PRODUCT ADVISORY COUNCIL
Account for the investment needed to stay competitive
Warren BuffettAnalytical perspectiveWB-P01The method
Account for the investment needed to stay competitive
When assessing operating returns, deduct the capital and working capital needed to maintain current competitiveness and business volume.
When to use it
- Assessing an established business’s continuing earning capacity or comparing expansion options.
Ask yourself
- If investment stopped, how would service capacity or competitive position deteriorate?
Put it into action
- Separate maintenance, expansion and one-off investments, and check working-capital needs.
- Reconcile accounting profit to cash generation and disclose the key estimates.
Keep these limits in mind
- Maintenance investment often requires estimates: use ranges and scenarios rather than false precision.
- Learning investment during exploration differs from maintenance in a mature business; this is not grounds to reject all early losses.