Warren Buffett Interpreation Of Financial Statement.

Income Statement

• Gross profit should be more than 50%.Avoid less than 20%.
• SGA , must consistant % of gross profit.Avoid consistently high SGA expenses co.
• R&D, high R&D have an inherent flaw in competitive advantage.
• Depreciation,very real expense and should always be included in any calculation of earning.Look for low depreciation.. e.g P&G only 7%.
• Interest expenses, look for less than 15% of operation income. Lower % in the industrial, better competitive advantage.
• Income before tax,using pre-tax income for analysis.
• Income taxes paid, US in 2008 about 35% of income, use this to counter check,e.g pre-tax income*35% compare to income tax paid.
• Net earning, looking for uptrend, look for % of revenue in up trend.E.g KO earn 21%, look for more than 20%, except bank, high % high risk.

Balance Sheet

• Shareholders' Equity ( Net worth,book value) , is all the assets substrate all the liability.
• Current Assest(Working Assest) , look for cash generate from ongoing business., no debt.
• Inventory, look for inventory and net earning corresponding rise.
• Prepaid Expenses e.g Insurance.
• Current ration : Current asset/current liability. Look for greater than 1.Some good earning power co, e.g KO has ratio of 0.95.
• Goodwill, buying amount over the book value.
• Long term investment, value of long term investment that more than a year,e.g stock. bond,real estate, invest in co subsidiaries.State at cost of market price whichever lower.
• Short term debt, when borrow short term and invest long term, problem occure when shorten interest increase higher than long term invest return.When invest in bank , look for less than 60% of short term debt over long term debt.
• Long term debt, look for min long term debt, yearly earning able to pay off all of it long term debt with 3 to 4 years.
• Minority interest, represents it value of buy over co that the co did not won.
• Debt to shareholders' equity ration is total liabilities/shareholder equity.Look for less than 0.8 unless is back about 10.
  
• Prefer and common stock carried in balance as par value, any money in excess of apr that was paid when company sold the stock is "paid in capital".Look for absence of preferred stock.
• Retained earning,accumulate no,look for growth, or it invest wisely.
• Treasury stock, share that buy back by the co.Good indicator.
• Return on shareholders' equity, is net earning/SE,higher the better, history of strong earning with negative SE, ok.

Cash Flow Statement

• Total cash from operating , is net income + depreciation + Amortization.
• Net change is cash is Total cash from OA +IA +FA.
• Capital Expenditure, look for low #, e.g KO only 19% of total earning, less than 50% of annual net earning.

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