Warren Buffett’s Financial Statement Rules of Thumb:
![💰](https://static.xx.fbcdn.net/images/emoji.php/v9/t5a/1/16/1f4b0.png)
INCOME STATEMENT:
1: Gross Margin
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Gross Profit / Revenue
Rule: 40% or higher
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Signals the company isn’t competing on price.
2: SG&A Margin
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: SG&A Expense / Gross Profit
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: 30% or lower
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Wide-moat companies don’t need to spend a lot on overhead to operate.
3: R&D Margin
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: R&D Expense / Gross Profit
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: 30% or lower
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: R&D expenses don't always create value for shareholders.
4: Depreciation Margin
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Depreciation / Gross Profit
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: 10% or lower
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Buffett doesn't like businesses that need to invest in depreciating assets to maintain their competitive advantage.
5: Interest Expense Margin
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Interest Expense / Operating Income
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: 15% or lower
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great businesses don’t need debt to finance themselves.
6: Income Tax Expenses
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Taxes Paid / Pre-Tax Income
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: Current Corporate Tax Rate
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great businesses are so profitable that they are forced to pay their full tax load.
7: Net Margin (Profit Margin)
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Net Income / Sales
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: 20% or higher
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great companies convert 20% or more of their revenue into net income.
8: Earnings Per Share Growth
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Year 2 EPS / Year 1 EPS
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: Positive & Growing
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great companies increase profits every year.
![⚖](https://static.xx.fbcdn.net/images/emoji.php/v9/ta/1/16/2696.png)
BALANCE SHEET:
9: Cash & Debt
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Cash > Debt
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: More cash than debt
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great companies don't need debt to fund themselves.
10: Cash & Debt
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Cash > Debt
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: More cash than debt
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great companies generate lots of cash without needing much debt.
11: Adjusted Debt to Equity
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Total Liabilities / Shareholder Equity + Treasury Stock
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule : < 0.80
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great companies finance themselves with equity.
12: Preferred Stock
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: None
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great companies don't need to fund themselves with preferred stock.
13: Retained Earnings
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Year 1 / Year 2
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: Consistent growth
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great companies grow retained earnings each year.
14: Treasury Stock
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: Exists
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great companies repurchase their stock.
![💸](https://static.xx.fbcdn.net/images/emoji.php/v9/t62/1/16/1f4b8.png)
CASH FLOW STATEMENT:
15: Capex Margin
![🧮](https://static.xx.fbcdn.net/images/emoji.php/v9/t31/1/16/1f9ee.png)
Equation: Capex / Net Income
![👍](https://static.xx.fbcdn.net/images/emoji.php/v9/tfc/1/16/1f44d.png)
Rule: <25%
![🤔](https://static.xx.fbcdn.net/images/emoji.php/v9/t34/1/16/1f914.png)
Buffett's Logic: Great companies don't need much equipment to generate profits.
Caveats:
![1️⃣](https://static.xx.fbcdn.net/images/emoji.php/v9/t7a/1/16/31_20e3.png)
There are plenty of exceptions to these rules.
![2️⃣](https://static.xx.fbcdn.net/images/emoji.php/v9/t99/1/16/32_20e3.png)
CONSISTENCY IS KEY!
What "rules of thumb" do you use?
https://www.facebook.com/groups/53286054621/?hoisted_section_header_type=recently_seen&multi_permalinks=10163480421914622
"Warren Buffett and the Interpretation of Financial Statements" By Mary Buffett
No comments:
Post a Comment