Forum Archive Index - May 2001

["Philip Robinson" <fire_appliance@hotmail.com>]

I was just going to post his on the Focus Investor Board but then I thought 
that everyone might be interested in this:

I was reading the The Buffetology Workbook (guru) , By Mary Buffet and David 
Clark, Dymocks, $29.95, and I found the chapter on assessing managements 
ability to utilize retained earnings. I always thought that there was no 
concrete way of measuring management ability, but this is one way to do it.

It says that you take the retained amount of earnings per share over a 
period of time then compare it to the increase of EPS during the same time.

Factious Example Follows:
For example if Surgical Supplies Limited had EPS of 0.20 in 1990, 0.21 ‘91, 
0.22 ‘92, 0.33, ‘93 etc. And paid out dividends of 0.08, 0.09, 0.10 cps etc 
per annum. Then look like this

0.20            0.08
0.21            0.09
0.22            0.10
0.23            0.11
0.24            0.12
0.25            0.13
0.26            0.14
0.27            0.15
0.28            0.16
0.29            0.17

1990-2000
Total Earnings $2.45 1990-2000
Total Dividends $1.25 1990-2000
Total Retained Earnings $1.20
Difference in EPS 1990 cf to 2000 is 0.09cps
Therefore return is 0.09/1.20 is 7.5%

It looks quite a good way of objectively assessing managements ability.

Cheers
Phil

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