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The Investing for Beginners Podcast - Your Path to Financial Freedom
Brian Feroldi Explains Why Warren Buffett Thinks EPS is Overrated
Oct 10, 2024
Brian Feroldi, a financial educator from Long Term Mindset, joins to discuss Warren Buffett's intriguing take on earnings per share, claiming it's overrated. The conversation emphasizes vital metrics like return on capital, including ROIC and ROE, as keys to truly gauge a company's health. Feroldi illustrates these concepts through examples, such as Amazon's growth challenges and Alcoa's poor stock performance due to low return on capital. He stresses the importance of capital allocation and realistic profit expectations for investors.
40:00
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Quick takeaways
- Warren Buffett argues that earnings per share can be overrated, emphasizing the need to focus on return on capital metrics instead.
- Investors should assess a company's growth by evaluating whether returns exceed the cost of capital to ensure value creation.
Deep dives
The Limitations of Earnings Per Share
Earnings per share (EPS) is often overrated in financial analysis, as it mainly reflects the profitability output of a company without considering the input costs associated with generating those profits. Warren Buffett emphasizes the importance of evaluating the return on capital, suggesting that focusing solely on EPS can ignore crucial elements such as capital efficiency and management effectiveness. By overlooking the relationship between what is invested and the profits generated, investors may misinterpret a company's true financial health. Hence, assessing return metrics relative to the cost of capital can yield more meaningful insights into a company's performance.
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Discover
highlights
Listen to the best highlights from the podcasts you love and dive into the full episode