If we were to think about a business as a racing car, we could make these parallels,
- The POWER of the engine would be the RETURN ON EQUITY (ROE)
- The ACCELERATION would be the FUTURE GROWTH in earnings
- The vehicle WEIGHT would be the DEBT, and
- The DRIVER would ne the MANAGEMENT.
Now, if we were to think about how we would choose a winning racing car...what would we be looking for? We're obviously looking for the highest powered, best acceleration, lightest weight car with a trusted, highly skilled and experienced driver behind the wheel.
What is most important for overall performance?
- POWER - Most Critical! This is the key to acceleration!
- ACCELERATION - The acceleration determines the speed that will be achieved at the end of the race
- WEIGHT - The lightest is best because it takes more power to accelerate a heavy vehicle!
- DRIVER - The drivers skills and experience will be critical. The difference with a business is the management can also tweak the performance of the engine on the go.
Back to businesses - we are looking for a business with HIGH ROE that drives HIGH GROWTH that carries LOW DEBT and has trusted, skilled and experienced MANAGEMENT that doesn't make mistakes.