Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

The Coca-Cola Company (KO) of the Internet

If there’s one piece of Buffett advice that investors should always live by is to try and invest only in companies with exceptionally high economic goodwill. By that, he means companies that are able to deploy their capital efficiently and have relatively low costs of maintaining their operations. Such companies can deliver their excess cash back to the hands of shareholders.

The ultimate example

When Buffett first bought into The Coca-Cola Company (NYSE:KO) back in 1988, he knew that he found the ultimate capital efficient business. Coke owns around $15 billion in property, plant, and equipment. It has $8 billion in long-term investments and more than $21 billion in cash and working capital. Altogether, that’s about $45 billion in capital. Against these assets, it can borrow roughly $42 billion – that’s long-term debt, receivables, etc. This is capital it doesn’t have to keep in the business because it has such a strong business and reputation, it can borrow at cheap rates. That’s been true, by the way, irrespective of the nominal level of interest rates. The Coca-Cola Company (NYSE:KO)’s real (that is, after tax and after inflation) cost of borrowing is extremely low. On a net basis, Coke runs its entire operation on only $3 billion in capital. And on this $3 billion in net capital, it produces annual cash flows in excess of $9.5 billion. That’s a return of 216% on net tangible capital. That’s a mouth- watering rate of return.

But that high rate of return on capital isn’t reserved only to consumer- brand names such as The Coca-Cola Company (NYSE:KO). From time to time, you can also find such examples in the internet sector.

The Coke of the internet space

Check Point Software Technologies LtdThe company that I wish to discuss makes its money from internet security and operates from Israel. Check Point Software Technologies Ltd. (NASDAQ:CHKP) is a leading provider of software that protects computer networks from malicious attacks. There’s a funny thing about internet security software. Once a business is used to using a specific software of one company, it isn’t likely to change and move to a competitor. I liken it to changing a doctor when you’re sick… you usually don’t want to do that. This competitive edge of Check Point Software Technologies Ltd. (NASDAQ:CHKP) shows up well in the results.

Cash flow

The company is gushing cash. It has grown its free cash flow at an average rate of 16.7% per year over the last 10 years. In fact, Checkpoint is now able to generate an astounding 71 times more cash than it needs to invest back into the business. Fortinet Inc (NASDAQ:FTNT), a fierce rival of Check Point Software Technologies Ltd. (NASDAQ:CHKP), generates only 6 times more cash than it needs to invest back into the business. Now, that’s the beauty of capital efficiency.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.