Go Directly to Warren Buffett Stocks Fundamental Tool ⬇
Warren Buffett is one of the best investors in the world. He has a net worth of over $100 Billion! The secret to his success is finding and holding great companies that continue to earn more and more over time, this makes Buffett and their shareholders superrich. We created our own Buffett Fundamentals Tool that looks over a company’s financial statements and provides a Buffett Company Score. This Buffett score is rated from 0-100, with 100 being the perfect company Warren likes to make him superrich.
We made this tool directly from the book “Warren Buffett and the Interpretation of Financial Statements” written by his former daughter-in-law Mary Buffett. In our tool we highlight the most important categories and what Warren himself looks for in the Income Statement, Balance Sheet Statement, and Cash Flow Statement.
We offer this Free Version of the Buffett Fundamentals tool, the Warren Buffett Stocks tool, which contains 5 years of financial staements and the last 5 quarterly statements. We indicate Warren Buffett’s key financial statistics in green or red in our financial statement tables.
Our full Buffett Fundamentals Tool has over 30 years of statements for each company, many with a link directly to the SEC filing. We also put together a table of the key statistics that Warren looks at and rank if the company in check meets Warren’s requirements. We look at the last 10-years of company filings and this is how we generate the Buffet Company Score.
In this Free Version (the Warren Buffett stocks tool), we also include the Buffett Equity Bond current Yield for each company and the Buffett Bond Capitalized Price Target, both to help you find out if it is a good time to buy into the company stock or wait longer until the price drops or earnings increase.
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Warren has witnessed the strength and predictability of the earnings growth of companies with a durable competitive advantage. This consistently strong growth turns these companies shares into somewhat of an Equity Bond, but this bond has an ever-increasing yield (interest payment)! The Bond is the company’s Shares/Equity. The interest payment is the company’s pre-tax earnings. Warren likes looking at pre-tax earnings over the after tax, but we include both for your own preference. Now we have the equity bond defined, but the key to these are that the interest payment which is pre-tax earnings is ever increasing, unlike normal bonds which typically have fixed payments. For example, Warren bought shares is Coke at $6.50 per share with pre-tax earnings of $0.70/share in the 80’s. This equates to a 10.7% equity bond yield. In 2007 Warren’s shares of Coke were now earning $3.96/share, and his original cost was $6.00/share so his equity bond yield is now 60.9%! Furthermore, if we use the current Long-Term Corporate Bond Yield we can see how the current stock price compares and if it is a good time to buy in. Obviously you would like your Equity Bond to yield more than the Corporate Bond rate because of the volatility of stocks. We can also get a good estimate or Price Target of where a company’s stock price should be using the Corporate Bond Yield. When we use the current Current Stock Price divided by the Corporate Bond Yield we get a price target of where the stock price could hit. The stock market will continue to undervalue or overvalue company’s stock prices but they should converge close to this Buffet Bond Capitalized Price Target.
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Learn About Each Table Category and Why they are Important.
Balance Sheet Statements
Cash Flow Statements
Warren Buffett Stocks: Fundamentals Table Definitions
Gross Profit Margin is Gross Profit / Total Revenues = Gross Profit Margin. Warren Buffett has found that companies with a durable competitive advantage (the winning companies Warren makes his money on) tend to have consistently high gross profit margins. Gross Profit is found in the Income Statements and our Income Statement Tables display Gross Profit Margin in Green if it meets Buffett’s requirements and Red if it doesn’t.
Selling, General, and Admin Expenses include management salaries, all payroll costs, travel costs, legal fees, advertising, commissions, etc. Warren Buffett has noticed that companies with a durable competitive advantage have a consistent Selling, General, and Admin Expense to Gross Profit Ratio. Companies without a competitive advantage show a significant amount of variation in this ratio. Selling, General, and Admin Expenses are found in the Income Statements and our Income Statement Tables display these expenses to Gross Profit Ratios in Green if it meets Buffett’s requirements and Red if it doesn’t.
Depreciation is the amount that a company’s equipment, machinery, buildings, etc. depreciate (lose value) in a given year. This is subtracted from the Gross Profit because it was “used” to produce the product/service the company provides that year. For Example, a ferry company bought a $1 Million dollar boat to ferry people back and forth. Most of the time the IRS will not allow a company to expense all $1 Million in the first year, instead the company will have to expense it at $100,000 a year for 10 years. Depreciation is a real business cost because eventually this company will have to buy a new boat and restart the depreciation for the new expense. Wall Street will sometimes use EBITDA to exclude depreciation costs. EBITDA looks at a company’s earnings before Depreciation and Amortization, but that is not accurate because the company will eventually need to buy a new boat and therefore Depreciation is a real cost and Warren Buffett agrees. Warren Buffett has found that companies with a durable competitive advantage have lower Depreciation and Amortization to Gross Profit ratios than companies that are in high competition. Depreciation and Amortization is found in the Income Statements and our Income Statement Tables displays this expense to Gross Profit Ratio in Green if it is within the realm of good businesses but Red if it shows a high amount of depreciation expenses compared to gross profit.
Interest Expense is the amount of interest a company paid out on its debt during the specific reported time period. Sometimes a company will make more money in interest than it pays out (i.e. Banks) but the majority of companies will pay more in interest than they make. This interest expense is a financial cost and reflects the amount of debt a company has. Warren Buffett noticed that companies with consistently little or no interest expense to operating profit ratio are typically companies with a competitive advantage. Interest Expense is found in the Income Statements and our Income Statement Tables displays this expense to Actual Operating Profit Ratio in Green if it meets Warren’s standards but Red if it does not. It is important to note the industry ratio and find the companies with the smallest ratio-they may have the competitive advantage.
Net Income (also known as Net Earnings and Net Profit) is the total revenue of a company less all of its expenses and taxes. It is what a company makes after it pays income taxes. Warren Buffett has found that companies with a durable competitive advantage have a general upward trend in Net Earnings. The Income Statement will show Net Income and our Income Statement Tables display Net Income in Green if it was higher than the last 5-year average and Red if not. This gives us a good idea if the Net Earnings are in a general Upward Trend. Important Note: Warren Buffett likes to look at Net Earnings over Earnings Per Share because company stock buybacks can shrink available shares and effectively increase Earnings Per Share without an increase or even a decrease in Net Earnings. This isn’t a bad thing but it can be hard to see if a company’s earnings are actually in a general upward trend unless we look at Net Earnings specifically.
Warren Buffet has learned that companies with a durable competitive advantage will show a higher percentage of Net Earnings (Net Income) to Total Revenue. The total revenue of a company alone will not give us much information about the company’s economics but the ratio to net earnings will. This is why we have put this ratio of Net Earnings to Total Revenues in our Income Statement Tables and display Green if it shows good economics, no color if its economics are in the gray area, and Red if shows bad economics.
The Earnings Per Share of a company are the Net Earnings / Shares Outstanding. On Wall Street this is a very important number because as the Earnings Per Share increases the stock price typically increases. Diluted Earnings Per Share is the same as Earnings Per Share but it adds in all convertible shares to the share total. This will bring the earnings per share down since you are dividing the earnings by more shares. This is a better number to go by so there are no surprises or inconsistencies due to convertible securities. Warren Buffett has found that companies with consistent and a general upward trend of Earnings Per Share have a durable competitive advantage. Increasing and consistent EPS is a great indication that a company has strong economics and can continue growing by increasing market share or use financial engineering like stock buybacks. The Income Statement will show Earnings Per Share and our Income Statement Tables display Earnings Per Share in Green if it was higher than the last 5-year average and Red if not. This gives us a good idea if the Earnings Per Share are in a general upward trend.
Cash and Cash Equivalents and Short-Term Investments are Current Assets of a company which include any cash, short-term bank CDs, three-month Treasuries, or other high liquid assets. When a company has a high amount of Cash and Cash Equivalents on hand it is telling Warren Buffett that the company either just sold a ton of debt (bonds or equity) to generate cash or that the company has a durable competitive advantage and generated tons of cash. The latter is what we are looking for. If a company continues to earn more than they spend, the cash continues to pile up which is a good sign of a company with a competitive advantage. Since every company has different levels of income and different amounts of cash, we decided to compare Cash and Equivalents to a Company’s Short-Term Debt. If it has more cash than short-term debt, we marked a “X” on our Buffet Table. In our Balance Sheet Tables, you will find Cash and Equivalents and we marked this with Green if the value was positive and Red if not to help draw the important parts of the Balance Sheet to your attention.
Inventory is a company’s products that it has in storage and warehouses ready to sell to customers. Inventory is found on the Balance Sheet and when a Balance Sheet is created it uses the company’s inventory for that specific day. Warren Buffett has found that consistent rising in inventory (along with rising net earnings) show a company has a durable competitive advantage. Our Balance Sheet Tables display Inventory in Green if it was higher than the last 5-year average and Red if not. This gives us a good idea if the Inventory is showing a consistent general upward trend.
Total Assets are a company’s current assets and long-term assets added together. The total assets of a company will equal the total liabilities plus shareholders equity and this is why it is called a Balance Sheet. Warren Buffett is able to measure a company’s efficiency using the Return on Asset Ratio = Net Income / Total Assets. Companies with good return on assets and a high amount of Total Assets are the companies Warren looks for. The higher amount of Total Assets represents a higher barrier to entry for potential competitors. For example, it would be hard to raise hundreds of billions of dollars to take on Apple. Warren avoids companies with extremely high Return on Assets. These create targets for competitors especially if the Total Assets is withing reach of funding. In our Balance Sheet Tables we indicate positive Return on Assets in Green and a negative or really high Return on Assets in Red. The red indicates a caution signal about the potential weakness of the competitive advantage of that company.
Short-Term Debt is any debt that a company owes within a year. Examples include commercial paper and short-term bank loans. Short-Term Debt is found under Current Liabilities in the Balance Sheet. Typically, Short-Term Debt is cheaper (lower interest rates) than Long-Term Debt. This means that a company could borrow short-term money and then lend it out on a long-term loan with a higher interest rate, and profiting on the difference in rates. Then when the short-term loan is due, they roll the debt into a new short-term loan. This works as long as the short-term rates stay lower than long-term rates. The problem is they don’t always stay lower than long-term rates and there is financial trouble and losses when they don’t. This is why Warren Buffett has a rule that amount of Short-Term Debt should be less than the amount of Long-Term Debt a company borrows. This is not a common concern among most industries except in the financial industry many banks will borrow more short-term debt than long-term debt trying to increase profits. In Warren’s book this can spell disaster in the future. Our Balance Sheet Tables indicate the Short-Term to Long-Term Debt Ratio in Green if it meets Warren’s expectations and Red if it does not.
Long-Term Debt is any debt that a company owes out past a year. Long-Term Debt is found under Long-Term Liabilities in a Balance Sheet. Once the Long-Term Debt comes due within a year, it is moved to Short-Term Debt on the Balance Sheet. Warren Buffett has found that companies with a durable competitive advantage have little or no Long-Term Debt on their Balance Sheet. The main reason is because these companies are so profitable they can self-finance what they need using their strong earnings and there is no need to borrow long-term debt. Warren’s rule for identifying companies with a durable competitive advantage is that in a given year they should be able to pay all of their Long-Term Debt within 3-4 years of that year’s earnings. In our Balance Sheet Tables we display the Long-Term Debt to Net Income Ratio in Green if it meets Warren’s standard and Red if not.
Retained Earnings is found in the Balance Sheet of a company’s financial statements. A company’s Net Income can be paid out as dividends, used to buy back the company’s stock, or retained to keep the business growing. When Warren Buffett took over Berkshire Hathaway, he immediately ended dividend payments. Instead, he kept any leftover profits in Retained Earnings and used that money to purchase companies with a durable competitive advantage. These companies he has bought have made him more money and more retained earnings and he kept repeating the process. Berkshire Hathaway went from pretax earnings of $4 per share in 1965 to $13,023 a share in 2007! Warren Buffett is looking for companies with a consistent rise in Retained Earnings. These are the companies that tend to have a durable competitive advantage because their strong profitability continues to grow their Retained Earnings balance. In our Balance Sheet Tables we display the Retained Earnings and specifically the Retained Earnings Growth. If the growth is positive we indicate this with Green which meets Warren’s standards and Red if not.
Equity or Shareholders Equity is what belongs to the stock owners after the Total Liabilities are deducted from the Total Assets. The Traditional Debt to Equity ratio tells us if a company uses debt or its earnings to finance its operations. Typically, strong companies will use their earnings and not debt. The problem with the traditional calculation is that strong companies will often have little to no Equity or Retained Earnings left because they use it on stock repurchases-these buybacks reduce the equity and retained earnings balances. This also increases their debt-to-equity ratio which makes them look like a mediocre business. However, if we tweak the debt-to-equity calculation and add back in the Net Stock Repurchases (Treasury Stock) we can discover companies with a durable competitive advantage. Warren has found that companies with less than specific ratio of Debt-to-Equity (adjusted) typically have a durable competitive advantage. It is important to note that financial institutions such as banks are highly leveraged meaning they will have high debt-to-equity ratios. In these types of companies, it is always good to compare them to each other and the company with the smaller debt-to-equity is typically the one Warren favors. In our Balance Sheet Tables we display the Debt to Equity Ratio in Green if it meets Warren’s standards and Red if not.
Preferred Stock is a special type of equity sold to the public to help a company raise money. Preferred stockholders do not have voting rights, unlike common stockholders who do. Instead, they have a fixed dividend payment and priority over the common shareholders for a dividend payment and in case of bankruptcy have priority over common. Warren has found that companies with a durable competitive advantage tend to not have any preferred shares outstanding. This is because the preferred shares are technically equity meaning they never have to be repaid, so the company will have the pay these dividends indefinitely. These dividends are not tax deductible, unlike interest payments on any debt the company issued. For these reasons it is an expensive way to raise money and companies will stay away from it if they can. Another indicator of a company with a durable competitive advantage is having no preferred shares on its capital structure. In our Balance Sheet Tables we display the Preferred Shares Red if they are present in the company’s capital structure.
Shareholders Equity is the company’s Total Assets – Total Liabilities. It is also equal to the sum of Preferred and Common Stock, plus retained earnings, minus treasury stock (stock buybacks). Therefore shareholders equity has three sources: initial common and preferred shares issued, and additional common or preferred shares issued, and finally the third and most significant is the accumulation of retained earnings. Equity belongs to the shareholders which is why it is called shareholders equity, and financial analysts have come up with Return on Shareholders Equity as a way to measure how well the company does with the shareholders money. Warren likes this calculation and has found that companies with a durable competitive advantage have high returns on equity. There are few great companies that tend to pay out all of their earnings to the shareholders via dividends and buybacks, in this case the shareholders equity may be negative, as long as the company shows a strong history of net earnings and other key Buffett characteristics it can be a company with a durable competitive advantage. In our Balance Sheet Tables we display the Return on Shareholders Equity in Green if it has the return that a company with a durable competitive advantage would have and Red if not.
Capital Expenditures are what a company spends on its long-term assets like property, plant, and equipment as well as intangible assets like patents. They are simply the assets expensed over a period of time greater than 1-year and are found on the Cash Flow Statement. Capital Expenditures are also the depreciation and amortization expenses on a balance sheet. Warren has found that companies who consistently have a large amount of Capital Expenditures can start to have a negative impact on earnings. Warren’s rule is that a company with a durable competitive advantage will use a smaller Ratio of its earnings on Capital Expenditures for continued operations than a company without a competitive advantage. In our Cash Flow Tables we indicate the Capital Expenditures to Net Income Ratio in Green if it meets Warren’s requirements for a company with a durable competitive advantage and Red if it does not.
Common Stock which is bought back by the company that issued it is known as Common Stock Repurchases on the Cash Flow Statement. This is also known as Treasury Stock. Companies that have durable competitive advantages have large profits and sometimes they can’t find enough reinvestment opportunities with it. In this case they can either pay dividends to shareholders, retain the money, or buy back shares. Warren Buffett does not like dividends because it forces the shareholders to pay taxes on them, instead he favors stock buy backs over dividends because it reduces the number of shares outstanding. This in turn would increase the Earnings Per Share (if the earnings stay the same) and eventually drives the stock price up, all tax-free. In the end if a company is consistently buying back more shares than it issues each year it is typically a company with a competitive advantage. On the Cash Flow Statement when a company buys back shares it will show up as a negative number because the company spent money to acquire those shares. In our Cash Flow Tables we indicate the Stock Repurchases in Green if the company bought more shares back then they sold in the given time period and Red if not.