Buffett's prize return on capital employed company - Scott Fetzer

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The profit numbers for Scott Fetzer are impressive enough (see last Newsletter), but the even more significant numbers were those for return on capital.  In 1992, for example, Scott Fetzer was employing only $120.7m of equity capital and yet produced after-tax earnings of more than $70.5m – see table.  Furthermore, it achieved this with “only minor amounts of borrowed money (except for the debt it employs – appropriately – in its finance subsidiary)” (BUffett’s 1992 letter).

Remarkably, it had reduced both inventory and fixed assets to less than when Berkshire bought it, resulting in more than 100% of its earnings being distributed to Omaha over the seven years to the end of 1992.  To do this and increase profit is spectacular.

Scott Fetzer’s net assets, profits and dividends 1986-1994

$m Book value (beginning of year) After-tax income   After-tax profit as a percentage of book value   Dividends to Berkshire Hathaway
1986 172.6 40.3 23% 125.0
1987 87.9 48.6 55% 41.0
1988 95.5 58.0 61% 35.0
1989 118.6 58.5 49% 71.5
1990 105.5 61.3 58% 33.5
1991 133.3 61.4 46% 74.0
1992 120.7 70.5 58% 80.0
1993 111.2 77.5 70% 98.0
1994 90.7 79.3 87% 76.0
TOTAL 555.4 634.0

Source: Buffett’s letters to shareholders 1986-1994 (you can gain some insight into the profits from the financial services side of SF from the difference between the earnings numbers in this table and the earlier chart: finance was making $3-4m after-tax in the earlier years and $8-10m in the later years)

Even though Berkshire had paid $315.2m to buy Scott Fetzer the book value of net assets its managers had to employ was a mere $172.6m according to the balance sheet that BH absorbed.

Despite earning only $40.3m in the first year Scott Fetzer was able to pay a dividend of $125m by using its surplus cash.  This performance was achieved with a balance sheet that has not been flattered by

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