The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market

by Tobias E. Carlisle

Not all growth is good. Only businesses earning profits better than the rate required by the market should grow. Businesses with profits below that rate turn dollars in earnings into cents on the dollar in business value.

For a business to be worth more than its invested capital, it must maintain a profit greater than the market requires.

Operating Earnings = Revenue - Cost of Goods Sold - Selling, General, and Administrative Costs - Depreciation and Amortization

Operating earnings are very similar to earnings before interest and taxes or EBIT. Many times, the numbers will be identical. But operating earnings differ from EBIT because the operating earnings figure is worked out from the top of the income statement down, and EBIT is worked out from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries, and sectors possible.

The company should own a real business, which should have historically strong operating earnings with matching cash flow, which confirms the accounting earnings are real.

If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.”