Monday, April 27, 2009

Coca-Cola vs Kraft

In this new Fortune article, Buffett states that Coca-Cola (KO) has no Tangible Common Equity (TCE).

I believe he could have just as easily said Kraft (KFT).

It turns out that Kraft has approximately minus $ 18B of TCE while Coca-Cola has plus $ 8 billion. In both cases, the accounting captures only a portion of economic Goodwill and that makes TCE or even (Common Equity) poor measures of the economic value. The fact that economic Goodwill matters more than accounting Goodwill is something Buffett wrote about at the end of the 1983 Letter to Shareholders.

The durable earning power of the franchise over time tells you more about a company's strength than TCE or any other simple snapshot measurement.

I've said before that this is more about the inherent limitations of accounting.

Adam

Long position in KO and KFT

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
 
Site Meter