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Warren Buffett and Interpretation of Financial Statements - FLAME PDF
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Warren Buffett and Interpretation of Financial Statements - FLAME ( PDFDrive.com ).pdf
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As an MBA student, I already have gone through Financial Accounting in school that's why I'll give this book 4 stars (super conservative, deserves a 5 though for those that are not aware of the financial statements). However, I loved the approach of this book towards the margins of expenses. I also used the MSN screener as suggested which is an amazing tool I wasn't using.
For people interesting in a summary I'll post below the key takeaways for all the statements + the valuation.
Income Statement:
Margins: Gross profit margin more than 50%-60%
SG&A to Gross profit have to be consistent!! Either high (50%-60%) or low (30%).
Net Earning to revenues = 20%+
Interest payout less than 15%
Low depreciation expense to gross profits. 10%
Low R&D costs 10%
10-year growth in eps
Balance Sheet:
For manufacturing
consistent growth in inventory.
Lower percentage of net receivables to its competitors=collects more frequently money.
Most companies with competitive advantage have current ratio below 1 = they earning power is so strong they can cover their current liabilities and pay generous dividends and stock repurchases that diminish cash. Current ratio is not an indicator of competitive advantage.
Property plant and equipment: no frequent updates/re purchases before it wears out, to keep up. Finance new plants internally.
Businesses with a competitive advantage never sell below their book value because of good will. If good will stays the same that means the company is not making new acquisitions or they are paying under the book value for a business. When businesses sell below book value with an increasing goodwill it’s a lifetime opportunity.
Intangibles: brand names of Coca Cola are not carried as assets on they balance sheet. Long-term earnings power.
Log-term investments: cost or market price, which ever is lower.
Return on assets: more could be less in the long term. Moodys 1.5B and 45% return can be taken over if the capital is raised. But $43B and 12 of Coca Cola is an impossible task.
Low to no long-term debt. Sufficient net earnings to pay all of the long-term debt within 3 to 4 years.
Minority Interest: represents the excess percentage of a business we own more than 80%. If we purchase more than 80% of the business we merge their balance sheet with ours. In this case, the 20% remaining value will be carried under minority interest to balance the equation.
Debt to equity below 1: the lower the better. If it’s negative they spend all the shareholders equity to buy back shares = tremendous earnings power. Add the treasury stock back to stockholders equity.
No preferred stock = strong earnings
Growth in retained earnings 7% or more constant over 5 years.
Net earnings / shareholders equity = 30% not competitive industry. ROE
Negative shareholders equity:
* Companies going bankrupt: negative net and sh. equity
* Companies so profitable don’t need to retain earnings. Positive net and negative sh .eq
Cash-flow statement
Low or No having capital expenditures= less than 20% Total 10 year Capex / Total 10 year net earning = less that 50% needs more research less that 25% is amazing.
Historical share repurchases: “issuance (retirement) of stock, Net”
Valuation
The “bond” is the company’s equity/shares and “coupon payments” the pre-tax earnings not dividends.
Stock price: $6.50 a share
Pre tax earnings: $.70 a share
After tax: $.46 a share
Historical (10 year) Annual rate earnings:15%
Bought an equity “bond” with pre-tax interest rate of 10.7% on his $6.5 investment.
Long-term interest rates at 6.5% and pre-tax / coupon payments of $54 a share, would be worth $830 a share. And was selling for $726-$885.