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Warren Buffett Describes the Ideal Business that He Likes  

The past weekend was an exciting one for investors.

For the first time ever, Warren Buffett’s Berkshire Hathaway streamed its annual general meeting (AGM) live to a worldwide audience. Buffett, who is regarded to be one of the best investors of our generation, took on different questions during its question and answer session.

One question stood out as it prompted Buffett to describe his ideal business. In his reply, Buffett shared his thoughts:

“The ideal business is one that takes no capital but yet grows. There are a few businesses like that and we own some, but we’d love to find one that we can buy.”

Not all businesses are alike. Some businesses require more capital reinvestment compared to others. Take Singapore Airlines Ltd (SGX: C6L). The graph below shows the airline operator’s operating cash-flow, capital expenditure and free cash flow generated over the last ten years.  

OCF FCF Singapore Airlines

Source: Morningstar

If you follow the red line above (representing capital expenditure) you can see that Singapore Airlines has been pouring back what it has earned back into its own operations. The airline operator has been spending around S$2 billion per annum to keep its business running.

It’s not hard to understand why. The airlines has to keep its planes updated and spend to maintain its current ones. This costs substantial capital.

On the other hand, a company like Vicom Ltd (SGX: V01) does not require as much capital reinvestment. Take a look at the graph below.

OCF FCF Vicom

Source: Vicom’s Earnings Report

In Vicom’s case, the vehicle inspection outfit has been able to keep its capital expenditure fairly low, coming below its operating cash flow for the period above.

The nature of business makes a difference here.

While Singapore Airlines has to stay ahead by updating its planes, Vicom is able to keep using the same equipment year after year. The inspection tests don’t change often, and therefore the need to reinvest capital is low. The extra cash will come in handy, as it can be distributed to shareholders as a dividend, be used to expand its business or be used to finance acquisitions.

In all, Buffett has made his argument for his ideal business. This represents one element of a business, albeit an important one.

What would your ideal business be?

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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 and Vicom.