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.