?? 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!
