Buffett's $1 test

In an earlier story, we had given a measure of assessing the capital allocation skills of the management. Here is another way of assessing the same by taking the market performance into account. This is important because, over long periods of time, good fundamental performance should translate into good market performance. It is the $1 test that Warren Buffett wrote about in his 1983 shareholder letter. He said, "We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained." Simply stated, this means that Re 1 of profit that a company retains should, over time, translate into at least Re 1 of market value. Buffett applies this on a five-year rolli