Wi$ 🇿🇦🇺🇸🇿🇦

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[Brian Feroldi @BrianFeroldi]

Warren Buffett’s Financial Statement Rules of Thumb:

INCOME STATEMENT RULES OF THUMB:

1: Gross Margin
→Equation: Gross Profit / Revenue
→Rule: 40% or higher
→Logic: Signals the company isn’t competing on price.

2: SG&A Margin
→Equation: SG&A Expense / Gross Profit
→Rule: 30% or lower
→Logic: Wide-moat companies don’t need to spend much on overhead to operate.

3: R&D Margin
→Equation: R&D Expense / Gross Profit
→Rule: 30% or lower
→Logic: R&D expenses don't always create value for shareholders.

4: Depreciation Margin
→Equation: Depreciation / Gross Profit
→Rule: 10% or lower
→Logic: Great businesses don't need a lot of depreciating assets to maintain their competitive advantage.

5: Interest Expense Margin
→ Equation: Interest Expense / Operating Income
→ Rule: 15% or lower
→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
→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
→ 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
→ Logic: Great companies increase profits every year.

⚖ BALANCE SHEET RULES OF THUMB:

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
→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
→Logic: Great companies finance themselves with equity.

12: Preferred Stock
→ Rule: None
→ Logic: Great companies don't need to fund themselves with preferred stock.

13: Retained Earnings
→ Equation: Year 1 / Year 2
→ Rule: Consistent growth
→Logic: Great companies grow retained earnings each year.

14: Treasury Stock
Rule: Exists
→ Logic: Great companies repurchase their stock.

💸 CASH FLOW STATEMENT:

15: Capex Margin
→Equation: Capex / Net Income
→ Rule: <25%
→ 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!

Want to go deeper into analyzing financial statements?

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What "rule of thumb" do you like best?

[BANKERX @Banker__X]

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[Brian Feroldi @BrianFeroldi]

Financial statement red flags.

Nice summary by @safalniveshak

[Katekani Shilubana @Frevo_Grandeur]

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[Wi$ 🇿🇦🇺🇸🇿🇦 @MrAmbass]

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[Compounding Quality @QCompounding]

Price is what you pay. Value is what you get.

But how can you determine a company is undervalued?

Here's everything you need to know about valuation:

[Wi$ 🇿🇦🇺🇸🇿🇦 @MrAmbass]

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[Wi$ 🇿🇦🇺🇸🇿🇦 @MrAmbass]

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[Daniel Mahncke @MnkeDaniel]

Aswath Damodaran is the ‘Dean of Valuation.’

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He also teaches millions of people online.

Here are 7 Key Valuation Lessons from the Dean👇🏼
(+PDF of his Class Presentation)

[Daniel Mahncke @MnkeDaniel]

Income Statement in plain English:

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[Wi$ 🇿🇦🇺🇸🇿🇦 @MrAmbass]

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