Growing Rich - Arabictrader.com

KIRK KAZANJIAN
in the future. “As an example, Boeing does a good job of making
airplanes,” he says. “But I have to tell you I think Coca-Cola has a
much better business. Both dominate their respective industries.
However, I believe Coke’s business is much better because it’s more
predictable. It is less capital-intensive. One of the problems with a
capital-intensive business is that it works fine as long as it keeps up
the volume of orders. But once there is a slowdown in demand, it
becomes very susceptible. In other words, if a company begins to
have problems with its revenue stream, its return on assets is bound
to go down rather quickly. The more fixed assets a business has, the
more difficult it is to sustain a high return on those assets.”
Although debt is definitely taken into consideration, Yacktman
contends there’s a natural tendency for his companies to be underleveraged.
If anything, he’s often prodding management to be more
aggressive about repurchasing shares and adding debt to the balance
sheet. “I think the managers of profitable corporations have a natural
tendency to underleverage their companies because it’s comfortable
and they think debt increases risk. They really don’t understand the
cost of capital and how debt can be used to lower the cost of this
capital,” he insists. “I would argue that if you’re buying equity at a
very low price and taking on reasonable risk, you’re not increasing
risk, but rather lowering the cost of capital. You have now created a
lower hurdle rate for capital expenditures. I like to see companies use
their debt capacity, because it reduces the cost of capital. Debt financing
is cheaper than equity financing. Having said that, the more debt
you put on the balance sheet, the less you should pay out in dividends.
Again, to me, the ideal company is one that has no dividend, but an
A as opposed to an AAA rating on its balance sheet. That way, if the
business slows down, all of the available cash flow can be used toward
debt repayment. When examining how much debt a company can
handle, the real number to look at is the coverage ratio. In other
words, how often does it cover its interest payment?”
Among the most important numbers Elizabeth Bramwell looks for
on a company’s balance sheet are long-term debt and equity. “I want
to see how inventory and accounts receivable are changing from one
quarter to another relative to sales,” she says. “I ask a lot of questions.
Is inventory increasing as rapidly as sales? What’s happening to that
inventory? Are there accounts receivable? If so, the company may be
shipping things but not collecting the money in a timely fashion.
190