As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy Ctrip.com International
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Ctrip meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Ctrip's earnings history:
Source: S&P Capital IQ.
Over the past five years, Ctrip's earnings have grown considerably.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity Ratio |
Return on Equity |
5-Year Average Return on Equity |
|---|---|---|---|
| Ctrip | 0% | 19% | 27% |
|
eLong |
0% | 1% | (1%) |
|
Expedia |
55% | 16% | (6%) |
|
Travelzoo |
0% | (4%) | 33% |
Source: S&P Capital IQ.
Ctrip generates superior returns on equity while employing no debt.
3. Management
Co-founder Min Fan has been CEO since 2006. Prior to co-founding Ctrip, he worked in the hotel and travel service industries.
4. Business
The online travel booking industry may not be wholly susceptible to technological disruption, though changing market dynamics is a part of the business.
The Foolish conclusion
Regardless of whether Buffett would ever buy Ctrip, we've learned that it exhibits some of the characteristics of a quintessential Buffett investment: consistent or growing earnings, high returns on equity, and tenured management.
To stay up to speed on the latest developments and analysis on Ctrip or any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks here.
