BUFFETT’S COMPANY ANALYSIS TEMPLATE.

BUFFETT’S COMPANY ANALYSIS TEMPLATE.

Below is a Summary of what Warren Buffett targets in a company’s three Financial Statements and his use of his Equity Bond Theory in order to evaluate a company and to determine a preferable purchase price.

In my opinion, one could regard all these requirements as a form of COMPANY ANALYSIS TEMPLATE with which an Industrial type company should comply in order to satisfy Buffett’s Investment Criteria, which should, in turn, lead to a profitable long-term investment.

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INCOME STATEMENT.

GROSS PROFIT :- Gross Profit = Cost of Sales/Revenue >40%

SG&A EXPENSES :- SG&A < 30% x Gross Profit 

R&D EXPENSES :- Little or Nil 

DEPRECIATION :- Depreciation < 10% x Gross Profit

INTEREST EXPENSE :- Interest Expense < 15% x Operating Income (i.e. EBIT)

PRETAX INCOME :- VERY IMPORTANT NUMBER, especially for previous 12 months

NET EARNINGS :- Net Earnings > 20% x Total Revenue

EARNINGS PER SHARE :- 10 Year Trend showing Consistency & Upward Trend

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BALANCE SHEET.

ASSETS.

CASH & SHORT TERM INVESTMENTS :- Ongoing increase from Business Operations NOT from One-Time events

INVENTORY :- Corresponding Rise in both Inventory & Net Earnings

CURRENT RATIO :- Current Assets/Current Liabilities < 1, due to Strong Earning Power

PROPERTY, PLANT & EQUIPMENT :- Low as possible

LONG TERM INVESTMENTS :- Large as possible. Should be Quality Investments, preferably in other DCA companies

RETURN ON ASSETS (ROA) :- High BUT with Large Total Assets to reduce Vulnerability

LIABILITIES.

SHORT TERM DEBT :- Avoid bigger borrowers of Short Term money rather than Long term money 

LONG TERM DEBT DUE :- Little or Nil

LONG TERM DEBT :- Long Term Debt < 3 x Annual Net Earnings

DEBT/SHAREHOLDER’S EQUITY :- Debt/S.H.Equity < 0.8 where S.H.Equity INCLUDES Value of Treasury Stock

PREFERRED STOCK :- Nil RETAINED EARNINGS :- Annual Increase > 7%

TREASURY STOCK :- Should appear and be regularly purchased

RETURN ON SHAREHOLDER’S EQUITY (ROE) :- Net Income/S.H.Equity > 25%

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CASH FLOW STATEMENT.

INVESTING OPERATIONS :- Based on +/-10 Year Period, Capital Expenditure/Net Earnings < 50% For DCA company this ratio is consistently < 25%.

FINANCING ACTIVITIES :- “Issuance (Retirement) of Stock, Net” to be a regular NEGATIVE Value. This indicates a NET Buying Back of its own Shares compared to a NET Issuance of its Shares. _______________________________________________________________

BUFFET’S EQUITY BOND. THE THEORY.

Companies with DURABLE COMPETITIVE ADVANTAGE (DCA) can be seen as an EQUITY BOND with a COUPON.

Equity Bond = Share Price Bond

Coupon = Pretax Earnings/Share

DETERMINE SHARE PRICE.

 Stock Market will price a DCA company’s Equity Bond at a level that approximately reflects the Value of its Earnings RELATIVE to the Yield on LONG TERM CORPORATE BONDS (LTCB)

Equity Bond = Share Price = Coupon Rate/Long Term Corporate Bond Rate (LTCBR)

Coupon Rate/LTCBR = Pretax Earnings/LTCBR

WHEN TO BUY.

 (1) Buy during Bear Markets or when share prices are depressed due to no fault of the company

 (2) Buy when Share Price < Pretax Earnings per Share/LTCBR by a reasonable discount

WHEN TO SELL.

 (1) Sell when presented with a BETTER company at a BETTER Price

 (2) Sell when a current DCA company is losing its Durable Competitive Advantage

 (3) Sell during Bull Markets or when prices are at unrealistically HIGH levels

 (4) Sell when P/E ratios > 40+, especially if the stock’s price far EXCEEDS THE LONG-TERM ECONOMIC REALITIES OF THE BUSINESS

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