Effective Business Valuation 101There ’ s a good reason why guys like Buffett stick to simple, easy -
to - understand businesses. Determining the cash fl ows of a business
such as Wrigley or Coca - Cola several years out will likely prove to be
more accurate than fi guring out how much cash Advanced Micro
Devices will produce.Value Investing 301: Seek Businesses with
a Wide Moat
Since calculating an intrinsic value involves predicting future cash
fl ows, you need to have some reasonable confi dence in the future
earnings growth of a business. For earnings to grow, a company
needs to increase revenue and at least maintain costs. And for the
most part, increased earnings should lead to increased cash fl ows in
the long run. Don ’ t spend a lot of time looking at one - time quar-
terly charges and the like when you ’ re looking for increased cash
fl ows. Instead, you might want to look at annual cash fl ow state-
ments for signs of a good, healthy increase in the rate of cash fl ow
growth.
Businesses that have competitive advantages or wide moats
around them usually throw off tons of cash, and they allow you to
predict future cash fl ows with a higher degree of certainty. Once
you fi nd an attractive business that you understand, you need
to determine whether the business has staying power or is under
constant threat from new entrants. An investment approach that
focuses on investing in wide - moat businesses and avoiding the no -
moat businesses will produce satisfactory long - term results.
The defi nition of a great business with a wide moat is one that
has at least some of these characteristics:- Recurring revenue streams
- Ability to produce at low costs
- A monopoly or oligopoly type of market positioning
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