Investing Guidelines: Financial Tenets 111Buffett does not give us any suggestions as to what debt levels are ap-
propriate or inappropriate for a business. Different companies, depending
on their cash f lows, can manage different levels of debt. What Buffett
does tell us is that a good business should be able to earn a good return on
equity without the aid of leverage. Investors should be wary of companies
that can earn good returns on equity only by employing signif icant debt.
Coca-Cola
In “Strategy for the 1980s,” his plan for revitalizing the company,
Goizueta pointed out that Coca-Cola would divest any business that no
longer generated acceptable returns on equity. Any new business ven-
ture must have suff icient real growth potential to justify an investment.
Coca-Cola was no longer interested in battling for share in a stagnant
market. “Increasing earnings per share and effecting increased return
on equity are still the name of the game,” Goizueta announced.^3 His
words were followed by actions. Coca-Cola’s wine business was sold to
Seagram’s in 1983.
Although the company earned a respectable 20 percent return on
equity during the 1970s, Goizueta was not impressed. He demanded
better returns and the company obliged. By 1988, Coca-Cola’s return
on equity had increased to 31.8 percent (see Figure 7.1).
Figure 7.1 The Coca-Cola Company return on equity and pretax margins.