Capital allocation is unquestioned as the most important role for any CEO and topic of importance when analyzing any new investment idea. Warren Buffett describes it as the core job responsibility for every CEO:
The lack of skill that many CEOs have at capital allocation is no small matter: After ten years on the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business.
But how do you actually analyze capital allocation?
There are a few good articles out there:
But most investors and write-ups simply take management’s capital allocation word at face value. If management says they plan to aggressively buyback stock, or make acquisitions, or whatever; then they’ll take those comments as gospel.
Nah. That’s rarely how it actually plays out. Instead, I use this tool to review capital allocation, both past and present.
Here’s an overview and a sampling of a few ideas putting it into practice.