Monday 29 April 2024

Great, Good and Gruesome Companies. Studying their financial statements.

 



















































?? INCOME STATEMENT:

1: Gross Margin

?? Equation: Gross Profit / Revenue

?? Rule: 40% or higher

?? Buffett's Logic: Signals the company isn’t competing on price.

2: SG&A Margin

?? Equation: SG&A Expense / Gross Profit

?? Rule: 30% or lower

?? Buffett's Logic: Wide-moat companies don’t need to spend a lot on overhead to operate.

3: R&D Margin

?? Equation: R&D Expense / Gross Profit

?? Rule: 30% or lower

?? Buffett's Logic: R&D expenses don't always create value for shareholders.

4: Depreciation Margin

?? Equation: Depreciation / Gross Profit

?? Rule: 10% or lower

?? Buffett's Logic: Buffett doesn't like businesses that need to invest in depreciating 

asset to maintain their competitive advantage.

5: Interest Expense Margin

?? Equation: Interest Expense / Operating Income

?? Rule: 15% or lower

?? Buffett's Logic: Great businesses don’t need debt to finance themselves.

6: Income Tax Expenses

?? Equation: Taxes Paid / Pre-Tax Income

?? Rule: Current Corporate Tax Rate

?? Buffett's Logic: Great businesses are so profitable that they are forced to pay 

their full tax load.

7: Net Margin (Profit Margin)

?? Equation: Net Income / Sales

?? Rule: 20% or higher

?? Buffett's Logic: Great companies convert 20% or more of their revenue into net income.

8: Earnings Per Share Growth

?? Equation: Year 2 EPS / Year 1 EPS

?? Rule: Positive & Growing

?? Buffett's Logic: Great companies increase profits every year.

? BALANCE SHEET:

9: Cash & Debt

?? Equation: Cash > Debt

?? Rule: More cash than debt

?? Buffett's Logic: Great companies don't need debt to fund themselves.

10: Cash & Debt

?? Equation: Cash > Debt

?? Rule: More cash than debt

?? Buffett's Logic: Great companies generate lots of cash without needing much debt.

11: Adjusted Debt to Equity

?? Equation: Total Liabilities / Shareholder Equity + Treasury Stock

?? Rule : < 0.80

?? Buffett's Logic: Great companies finance themselves with equity.

12: Preferred Stock

?? Rule: None

?? Buffett's Logic: Great companies don't need to fund themselves with preferred stock.

13: Retained Earnings

?? Equation: Year 1 / Year 2

?? Rule: Consistent growth

?? Buffett's Logic: Great companies grow retained earnings each year.

14: Treasury Stock

?? Rule: Exists

?? Buffett's Logic: Great companies repurchase their stock.

?? CASH FLOW STATEMENT:

15: Capex Margin

?? Equation: Capex / Net Income

?? Rule: <25%

?? Buffett's Logic: Great companies don't need much equipment to generate profits.

Caveats:

1?? There are plenty of exceptions to these rules.

2?? CONSISTENCY IS KEY!



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