Three quick tests to identify the best companies to work for are as follows:
Earning Test: Check the yearly per share figure. Look at the per share earnings for a 10 year competitive advantage. Warren looks for a per share earnings that is consistent. Per share earnings of $1.3 1990, and 2001, $1.6, 2005, $2.35, 2007, $2.68, 2008 $2.95 = a promising company. So you can see a long-term upward trend. So the company must have a competitive advantage. Consistent earnings is a good sign that the product is good. The companies economics are promising. If the yearly earnings are wildly unstable, then you are working in the wrong company. You might even see a downward industry, the boom increases demand which increases prices, this increases costs, and supply increases causing the prices within the industry to drop. There are 1000s of companies with this problem of competitive advantage which will destroy your results.
Debt Test: companies that have a low debt, surplus of cash with self-financing, and they can weather a recession. You need to gauge debt based on a given industry, but the general rule is that if a company that has more than 5 times the debt versus earnings then you are in bad shape. High levels of debt is due to uncompetitiveness. The company that is highly leveraged means that the company will eat any excess cash, and even your own job. There will be no excess capital, and little growth in managerial opportunities.
Gross Margin Test: you can look at the companies gross profit margin, you need to look at the financial forum. You look at revenue, and then cost of goods sold. Gross profit divided by revenue = gross profit margin. 10,000 total revenue – 6,000 cost of goods sold = 4,000 Gross Profit / 10,000 = 40% Gross Profit margin.
Coca-Cola 60% Gross profit margin, Wrigley Gum has a Gross profit margin of 51%
Versus
United Airlines has a gross profit margin 14%, US Steal has a gross profit margin of 14%, Goodyear has a gross profit margin of 20%.
Microsoft has a 79% gross profit margin, Microsoft produces better software.
- You need to price yourself way higher than the cost of goods sold. If you are working for poor inherent economics then you should consider leaving that company now.
[This is a précis of Warren Buffett’s Management Secrets. More is forthcoming]