This case study will provide an overview of the Coca-Cola Company as the perfect business as it pertains to the characteristics that make up a good business. A series of three questions will be discussed. Identifying four characteristics of a good business, identify four companies that display these characteristics, and in three years after purchasing common stock in these companies determine if the present analysis was correct.
Discuss at least four characteristics of a good business
There are many highly successful investors, each having their own criteria for what constitutes a good business. I chose to look at Warren Buffet and his investment principles. No one can argue his success as an investor. High ROE – The return that a company gets on its equity is one of the most important factors in making successful stock investments. The higher return on equity allows a company to invest surplus funds back into the company. This means there is less need for owners/stockholders to invest additional funds and there is less need to borrow. (Warren Buffett’s Secrets, n.d.) High/Free Cash Flow – A measure of financial performance and stability is calculated as operating cash flow minus capital expenditures. Free cash flow represents the cash that a company has on hand after it maintains and/or expands its asset base. This is important because it allows a company to pursue opportunities that enhance shareholder value. With little or no cash, it is difficult to develop new products, make acquisitions, pay dividends and most importantly reduce debt. The biggest concern is long-term debt. Increases in interest rates can drastically affect company profits and make future cash flows less predictable. (Investopedia) Earning Capacity/Growth – When a company grows its profits grow, as do returns to the investor. The important thing to consider as an investor is that the company increases the returns to shareholders. One thing to look at is...
References: Warren Buffett’s Secrets. (n.d.). Investment Principles of Warren Buffett. Retrieved from
Investopedia. (2011). Free Cash Flow – FCF. Retrieved from http://www.investopedia.com
Morris, S. (2011, May). American Express: The Best Stock in Warren Buffett’s Portfolio.
Retrieved from http://seekingalpha.com/article/271111-american-express-the-best-stock-in-
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