Brian Stoffel's Linkedin Analytics

Warren Buffett’s Financial Statement 'Rules of Thumb': 💰 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 assets 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: 1️⃣ There are plenty of exceptions to these rules. 2️⃣ CONSISTENCY IS KEY! What "rules of thumb" do you use? Follow me Brian Stoffel for more content like this *** P.S. Want to master the basics of accounting (for free)? 📕 Grab our FREE accounting infographic ebook: → https://lnkd.in/geciS9nM If you found this post useful, please repost ♻️ to share with your audience.