Warren Buffett Tenet 10 : Retained Earnings and Market Capitalization

“Unrestricted earnings should be retained only where 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.”

Warren Buffett

Earning Profit is key factor in investment decision. For Warren also, it is important decision. Even though he Supporting for Dividend Payout for Companies. That does not mean he against the concept of retaining part of Profit With company. In fact in his formula he clearly mentioned Capitalization expenses. All his followers know that Birkshire Hathaway always keep big Cash on its Balance Sheet. Some people who are curious about it also know the reason for it.

So Warren Buffett is not against the Retaining earning. But he pressure on making out of it. As Birkshire Hathaway is holding company, Warren Buffett need to Invest in many other companies. But what about Car makers? Or companies like Wall mart, Coca-cola, P&G, Bank?

Distribution of all the Profit is not good decision. Warren Buffett clearly mentioned it here. But he also focus on the increasing market value of the company with respect to Retaining Profit.

In India there are some companies which are not trading as per the Ratio. Like steel Companies, PSU banks. So what is the issue?

Market is very Intelligent. It knows what is the issue with them. Like for steel industry, there is dumping issue with them. Then there is NPA issue with banks. So market know what is actual value of the reserves.

And so with this tenet, Warren Buffett indirectly telling that buy good companies Which don’t have any big issue.

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About Ashutosh Tilak

Tracking Indian Capital Market since 2010. Finance Student, On this blog I am writing about finance and Investing. You can contact me analystashu@gmail.com or @androidashu & @InsideFinanc on twitter