From these experiences, Fisher came to believe that people could make superior profits by (1) investing in companies with above-average potential and (2) aligning themselves with the most capable management. To isolate these exceptional companies, Fisher developed a point system that qualified a company by the characteristics of its business and its management.
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As to the first—companies with above-average potential—the characteristic that most impressed Fisher was a company’s ability to grow sales over the years at rates greater than the industry average.6 That growth, in turn, usually was a combination of two factors: a significant commitment to research and development, and an effective sales organization.
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A company could develop outstanding products and services but unless they were “expertly merchandised,” the research and development effort would never translate into revenues. In Fisher’s view, however, market potential alone is only half the story; the other half is consistent profits. “All the sales growth in the world won’t produce the right type of investment vehicle if, over the years, profits do not grow correspondingly,” he said.
Accordingly, Fisher examined a company’s profit margins, its dedication to maintaining and improving those margins and, finally, its cost analysis and accounting controls. No company, said Fisher, will be able to sustain its profitability unless it is able to break down the costs of doing business while simultaneously understanding the cost of each step in the manufacturing process.
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To do so, he explained, a company must instill adequate accounting controls and cost analysis. This cost information, Fisher noted, enables a company to direct its resources to those products or services with the highest economic potential. Furthermore, accounting controls will help identify snags in a company’s operations.
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These snags, or inefficiencies, act as an early warning device aimed at protecting the company’s overall profitability. Fisher’s sensitivity about a company’s profitability was linked with another concern: a company’s ability to grow in the future without requiring equity financing. If a company is able to grow only by selling stocks, he said, the larger number of shares outstanding will cancel out any benefit that stockholders might realize from the company’s growth.
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