What I Learned About Investing from Darwin

by Pulak Prasad

What about total capital employed? This typically comprises two factors: net working capital and net fixed assets. In the net working capital number, we like to exclude excess cash (i.e., cash minus debt if cash happens to be much greater than debt) because extra cash is not an operating asset. Also, high-ROCE companies generate a lot of cash, and incorporating cash into the capital employed number will unnecessarily reduce ROCE. If you are uncomfortable with this, you can include a portion of cash in capital employed. For an acquisitive company, we also include the capital invested in acquiring businesses, but let’s keep things simple for the moment. Thus, ROCE for nonfinancial companies can be defined as follows: EBIT ÷ (net working capital + net fixed assets)

six types of businesses we avoid at all costs: 1. Those owned and run by crooks 2. Turnaround situations 3. Those with high levels of debt 4. M&A junkies 5. Those in fast-changing industries 6. Those with unaligned owners

The median trailing price/earnings (PE) ratio for our portfolio at the time of our investment is less than 15 when the Indian market has been about 19 to 20. We have rarely ever paid more than twenty times trailing PE.