Warren Buffett’ s “One-Dollar” metric


Warren Buffett’ s “One-Dollar” metric

One of the key metrics that Warren Buffett evaluates in any business decision is ‘One-Dollar’ measure, which is found in Hagstrom’s “The Warren Buffett Way”

The theory explains that for every dollar of retained earnings that a company holds and doesn’t pay out in dividends, how much was created in market value.

This is an excellent measure of how to judge how strong a company really is.

I tried to come up with an example using Asian Paints stock for the period 2000 to 2012

Following Bonus shares were issued by Asian Paints during this period
28/05/2003             1 : 2
30/05/2000             3 : 5

N.P – Net Profit
Div – Dividend
R.E – Retained Earnings – taken as Net profit – Dividend
M.C – Market Cap (Taken the highest share price of the year * # of shares in that year)

 All numbers are in crores (source – moneycontrol.com)

Year

N.P

Div

R.E

M.C

2000

97.34

40.12

57.22

1,435.00

2001

106.39

44.93

61.46

2002

115.33

57.77

57.56

2003

142.01

70.61

71.40

2004

147.79

81.53

66.26

2005

173.48

91.13

82.35

2006

187.81

119.90

67.91

2007

272.05

124.70

147.35

2008

375.20

163.06

212.14

2009

362.36

167.86

194.50

2010

774.50

258.98

515.52

2011

775.15

306.94

468.21

2012

958.39

383.69

574.70

43,139.00

TOTAL

4,487.80

1,911.22

2,576.58

Total retained earnings from 2000 to 2012 = 2576.58

Total increase in market cap from 2000 to 2012 = 41704.00 approx

Every rupee of retained earnings is equal to = 41704.00 / 2576.58 = 16.185

So instead of paying out as dividend to shareholders, Asian Paints has generated a value of 16.185 for each rupee retained.

Hence, from this metric point of view, Asian Paints as a company is truly a Wealth Generator for investors.

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