Capital Allocation – How to think about excess cash?

This is a snap shot taken from Quality Shareholders by Lawrence Cunningham. The book elaborates on the actions management can take to attract high quality shareholders. These are the shareholders you want. They load up and stick around.

There is a section in the book on capital allocation. Capital allocation is most important decision management has to make. A lot has been written on the subject. Maybe I will write a post on the subject soon.

I like the figure above. I’m visual in nature. The framework highlights the capital allocation decision making process.

A business generates excess cash. What action you take with excess cash will often determine the future returns of the business.

  1. Do you re-invest in the business?
  2. Do you pay down debt?
  3. Do you repurchase shares?
  4. Do you distribute a dividend?
  5. Do you make an acquisition?

Making the right decisions is not always straightforward. But having a structure framework in place can guide management towards better decision making. And better decision making can led to superior returns.

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