Value investing · Course 7 of 39 · Judging a business
Management and capital allocation
What management does with the cash, and how to judge it: reinvestment, acquisitions, dividends, buybacks, stock pay, incentives, insiders and the earnings call.
For a reader who can already read what a business earns and wants to judge what management does with the cash that earning produces. A business's returns come from the numbers; capital allocation is the decision layer sitting on top of them, and it is management's decision, not the market's.
After this course you can sort a decade of a company's cash into its five uses: reinvestment, acquisitions, dividends, buybacks and debt repayment, and judge each one on the return it earned rather than its size alone. You can read a buyback or an acquisition for the price actually paid, track stock-based pay against the shares a buyback retires, and read the proxy, the insider filings and the earnings call for what they add to that picture and what they leave out.
It assumes Reading financial statements and Accounting quality.
The test, not the verdict
Management and capital allocation is 8 lessons on the tests and where their lines sit. Whether a company you hold clears one of them is a separate question that needs its filings read, and nothing on these pages has read them.
See our methodology for how the product reads a filing and what it refuses to compute.