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The Best Companies that Warren Buffett May Buy

Credit: Fool Editorial Photos

Would you like to know which companies that billionaire Warren Buffett favours the most? And perhaps, more importantly, why he would favour these companies.

Thankfully, the investing maestro was generous in sharing his thoughts last month in the Annual General Meeting for his firm, Berkshire Hathaway Inc. In this festival-like atmosphere, the Oracle of Omaha had these particular words to share about the best businesses that he prefers – in periods of inflation and arguably, otherwise:

The best businesses during inflation are the businesses you buy once and you don’t have to keep making capital investments subsequently. So you don’t face the prospect of continuous reinvestments in higher dollar values during periods of inflation.

Companies with low capital investments 

Said another way, Buffett prefers companies that use as little capital investments as possible for additional gains in revenue in the future.

For example, flagship airline carrier Singapore Airlines Ltd (SGX: C6L) – or better known as SIA – might not make the cut by Buffett’s standards. As you can see in the summary chart below on SIA, the airline carrier has to continually add capital expenditure as it expands.

SIA operating cashflow-fcf-capex

Source: Morningstar

This might not be surprising.

To connect more cities and provide more flights, new fleets of aircrafts will need to be added by SIA. The capital expense involved in purchasing or leasing new aircrafts are significant and its operating cash flow is often dried out by its capital expenditures, leaving little free cash flow behind.

On the other hand, a company like property management firm ARA Asset Management Limited (SGX: D1R) may be a company which might interest Buffett.

The graph below shows ARA Asset Management’s financial performance since 2008. If we track the operating cash flow (red line) and the free cashflow (yellow line) in the graph below, we can see that the capital expenditure(the difference between operating cashflow and free cashflow) for the company is almost non-existent as the company expands its revenue.

Chart 1, ARA Asset Management's operating income, operating cashflow, free cashflow, and net income

Source: S&P Capital IQ

So, what company will you prefer?

Judging from the share price performance of the two companies mentioned above since the start of 2010 (see chart below!), I reckon that the Foolish investor will side with Buffett on this one. Fool on!

2015-06 ARA vs. SIA Chart

Source: Google Finance; Blue line (ARA Asset Management); Red line (SIA)

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Berkshire Hathaway Inc and ARA Asset Management.