Summary Of What Warren Buffett (Trades, Portfolio) Looks For In The Financial Statements

Summary Of What Warren Buffett (Trades, Portfolio) Looks For In The Financial Statements:

Income Statement	(DCA = Durable Competitive Advantage)	Comments
Gross Profit Margin	>40% = D.C.A. <40% = competition eroding margins <20% = no sustainable competitive advantage	Consistency is Key
SG&A (SGA as % of gross profit)	< 30% is fantastic. Nearing 100% is in highly competitive industry	Consistency is Key
Depreciation(depreciation costs as a % of gross profit)	Company with moat tend to have lower %
Interest Expenses(interest expenses relative to operating income)	Durable competitive advantage carry little or no interest expense.Warren Buffett(Trades, Portfolio)'s favorite consumer products have <15%	Company with lowest ratio of interest to Operating Income = competitive advantage.Varies widely between industries.
Net Earnings (% net earnings to total revenues)	Net earnings history >20% = Long Term moat < 10% = in highly competitive business	Consistency and upward LT trend
EPS	10-year period showing consistency and upward trend. Avoid erratic earnings pictures.	Consistency = sign products don’t need to change. Upward trend = strong
Balance Sheet
Cash and Equivalents	Lots of cash and marketable securities + little debt	Test to see what is creating cash by looking at past 7 yrs of balance sheets
Inventory	Look for an inventory and net earnings that are on a corresponding rise	Inventories that spike up/down are indicative of competitive industries prone to (boom/bust)
Net Receivables	Consistently shows lower % net receivables to gross sales than competitors	d.c.a. no need to offer generous credit
Goodwill	Increase in goodwill over number of years assume because company out buying companies >BV	d.c.a.’s never sell for less than BV
LT Investments	Can have valuable assets on books at valuation < market price (booked at lowest price)	Tells us about investment mindset of management (Looking for d.c.a.?)
Intangible Assets	Internally developed brands not reflected on BS
Total Assets + ROA(Measure efficiency using ROA)	Higher return the better (but really high ROA may indicate vulnerability in durability of c.a.)	Capital = barrier to entry
ST Debt	Financial institutions. Warren Buffett(Trades, Portfolio) shys from those who are bigger borrowers of ST than LT debt
LT Debt Due	d.c.a. need little or no LT debt to maintain operations
Total CL + Current Ratio	Higher the ratio, the more liquid, the greater its ability to pay CL	d.c.a.’s don’t need ‘liquidity cushion’ so may have <1
LT Debt	LT debt load for last ten yrs. ten yrs w/ little LT debt = d.c.a.	Earning power to pay their LT debt in <3/4 yrs = good candidates
Total Liabilities + Treasury Share-Adjusted debt to Shareholder Eq Ratio	If <.80, Good chance company has d.c.a.
Preferred + Common Stock	In search for d.c.a. we look for absence of preferred stock
Retained Earnings	Rate of growth of RE is good indicator
Treasury Stock	Presence of treasury shares and a history of buyback are good indicators that company has d.c.a.	Convert –ve value of treasury shares into +ve and add shareholder eq. Divide net earnings by new shareholders eq. give us return on equity minus dressing.
Return on Shareholder equity	d.c.a. show higher than average returns on shareholders equity	If company shows history of strong net earnings, but shows –ve sholder equity, probably d.c.a. because strong companies don’t need to retain
Cash Flow Statement
Capital Expenditures	Historically using <50% then good place to look for d.c.a. <25% probably has d.c.a.	Add up total cap exp for ten-yr period and compare w/ total net earnings over period.
Stock Buybacks	Indicator of d.c.a. is a history of repurchasing/retiring its shares	Look at cash from investment activities. “Issuance (Retirement) of Stock, Net