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Chapter 3

Unveiling the Big Five: Unlocking Business Success

Congratulations, you are making your way into the realm of strategic investing! Whether you're a seasoned investor or new to the game, mastering the concept of the "Big Five" is essential for making savvy investment decisions. These numbers are like your investment compass, guiding you toward businesses with strong competitive advantages – the elusive "moats." Let's dive into what the Big Five are and why they hold the key to unlocking long-term business success.

The Big Five: Your Moat Indicators

Picture this: the Big Five are the spotlight that reveals a business's hidden moat. If a business boasts at least one of these numbers, it's a sign that it's fortified against competition. On the flip side, businesses without solid Big Five numbers are treading on thin ice when it comes to predicting their future success. These numbers are a beacon of insight into a company's potential.

Decoding the Big Five Numbers

So, what are the Big Five, you ask? Let's break it down:

  • Return on Investment Capital (ROIC): This measures the return a business generates on the money it invests in itself. If a lemonade stand invests $200 and makes $100 in profit, its ROIC is 50%. ROIC reflects management's efficiency in using invested funds.

  • Sales Growth Rate: This is the rate at which a business's revenue grows over time. A growth rate of 10% or more annually is a key indicator of a strong business.

  • Earnings Per Share (EPS) Growth Rate: EPS growth reveals how a company's profits per share are increasing. A growth rate of 10% or higher indicates a robust business.

  • Equity or Book Value Per Share (BVPS) Growth Rate: BVPS growth showcases the increase in a company's net assets per share. Again, a growth rate exceeding 10% is a positive sign.

  • Free Cash Flow (FCF) Growth Rate: FCF growth measures the increase in cash a business generates after covering expenses and investments. A growth rate of 10% or more is a reassuring indicator.

The Magic Number: 10%

To be considered strong, all the Big Five numbers should be equal to or greater than 10% annually for the past 10 years. This consistency over a decade is a testament to a company's enduring strength.

Why ROIC is Your First Stop

If there's one number to prioritize, it's ROIC. A robust ROIC, above 10% per year for the last 10 years, often indicates a business with a significant moat. Such businesses are less likely to face constant price pressure from competitors, as their moats provide protection. A strong ROIC is a sign that the company's management is aligned with the interests of its owners.

A Peek Into the Past: The Power of History

When evaluating businesses, it's crucial to assess their historical performance. Look at the 10-year average, the past 5-year average, and the most recent year's average for ROIC. This triad of numbers provides a comprehensive understanding of the company's trajectory.

Conclusion: Your Investment North Star

Mastering the Big Five is like holding a treasure map in your hands. By scrutinizing these numbers, you can discern which businesses have built formidable moats around themselves. These moats offer protection, growth, and long-term potential. Remember, the Big Five are your guideposts to finding businesses that are not only surviving but thriving. As you embark on your investment journey, armed with these numbers, you're well on your way to making informed decisions that could shape your financial future.