Hello Community,
Products, strategies or growth stories often take center stage. But what really determines the long-term success of a share is the capital allocation - i.e. the question of how the management deploys the available capital.
🔎 What does capital allocation mean?
Companies generate profits and cash flows. These can be used in various ways:
1️⃣ Reinvestment in own business (e.g. R&D, expansion, new products)
2️⃣ M&A (takeovers) - Only makes sense if there are real synergies
3️⃣ Share buybacks - only value-enhancing if the share is undervalued
4️⃣ Dividends - Return of capital to shareholders
5️⃣ Debt reduction - strengthens balance sheet & creditworthiness
🚦 Why is this so crucial?
Capital allocation is the lever for value creation per share.
❌ Poor allocation: Capital destruction (example: WeWork $WWOK - billions in prestige projects & "growth at any price").
✅ Good allocation: Compounder effect (example: Berkshire Hathaway $BRK.B (+1,12%) - Capital flows consistently into high-ROI investments).
📊 What I pay attention to as an investor:
ROIC (Return on Invested Capital) → shows whether reinvestments create value.
ROE (return on equity) → measures the return on equity.
EPS growth per share (not only absolute profit - note dilution!).
Buybacks/dividend history → rational or marketing?
🏆 Best practices:
Constellation Software ($CSU (+3,21%)
)Serial acquisitions in the software sector with disciplined use of capital.
Novo Nordisk ($NOVO B (+0,91%)
): Reinvestment in R&D with extremely high ROI.
Berkshire Hathaway ($BRK.B (+1,12%)
): Flexible, rational, benchmark for capital allocation.
📌 Conclusion:
It is not the product, but the use of capital that determines the return. As an investor, you should always ask yourself:
👉 Can this management deploy capital better than I can?
➡️ Community question:
Which stock in your portfolio do you think has the best capital allocation? And which is the worst?
#CapitalAllocation
#Investieren
#Aktienanalyse
#BerkshireHathaway
#ConstellationSoftware
#NovoNordisk
#DerSpekulant
