What is a good rate of return on capital? – Warren Buffett’s perspective

In Buffett’s latest letter to Berkshire Hathaway shareholders he provides guidance on what we should be looking for regarding the return a business makes in terms of profits relative to the capital devoted to it.

We would all like to find businesses where managers are so brilliant or the economic franchise is so strong that it generates 100% return on the assets at managers’ disposal every year. But such gems are very hard to find (they do exist, though).

Most of the time we have to settle for returns on capital in the low teens. These companies can still make very good investments – if bought at the right price.

Here are Buffett’s comments on some of his business:

“This collection of businesses is truly a motley crew. Some operations, measured by earnings on unleveraged net tangible assets, enjoy terrific returns that, in a couple of instances, exceed 100%. Most are solid businesses generating good returns in the area of 12% to 20%.

A few, however – these are serious blunders I made in my job of capital allocation – produce very poor returns. In most……………………….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

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