Warren Buffett wrote the following in the 1979 Berkshire Hathaway (BRKa) shareholder letter:
The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share. In our view, many businesses would be better understood by their shareholder owners, as well as the general public, if managements and financial analysts modified the primary emphasis they place upon earnings per share, and upon yearly changes in that figure.
It's not about earnings growth in a vacuum. A business generating high returns on capital combined with a management team that understands the "primary test" of performance will produce favorable long-term shareholder returns.
The business must be capable of generating increases to earnings with small amounts of incremental capital yet remain competitive.
Many businesses fail on that last part. To remain competitive most businesses need substantial amounts of additional capital.
See's Candies is a very good example of a business that needs little incremental capital yet remains competitive while producing outstanding returns on capital. As a result, shareholders are consistently enriched.
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