How Does Buffett Quickly Analyze a Stock?#
When Buffett selects stocks, he typically filters companies by analyzing financial statements. In the book "Working with a Tap Dance," when asked about the source of his creativity, Buffett replied that it mainly relies on reading; his daily work involves a lot of reading. By reading annual reports and analyzing specific financial indicators, he conducts preliminary screening.
1. Return on Equity (ROE)#
This indicator measures a company's efficiency in using capital, commonly calculated as ROE = Net Profit / Average Net Assets. Through the DuPont analysis, ROE can be broken down into three components: ROE = Net Profit Margin * Asset Turnover * Financial Leverage. It comprehensively reflects the operational status of the enterprise, and Buffett believes that ROE should be above 15%. The following analysis uses the financial reports of Kweichow Moutai for 2023 and 2024 as an example.
For example, Kweichow Moutai's ROE for 2023 and 2024 is 34.19% and 36.02%, respectively, an increase of 2 percentage points. Considering that the company holds a large amount of unused cash, the ROE excluding cash for 2024 may approach 50%, indicating that Moutai can recover its investment costs within two years.
2. Gross Margin#
Gross Margin = (Operating Revenue - Operating Costs) / Operating Revenue, directly reflecting the profit space of the product. For example, if a product sells for 100 yuan and costs 40 yuan, the gross margin is 60%. Buffett requires a gross margin above 40%, as a high gross margin indicates that the product has unique advantages, a wide moat, and strong risk resistance.
The gross margins in China's liquor industry are generally high. For Kweichow Moutai, the gross margins for 2023 and 2024 are 92.11% and 92.01%, respectively, a year-on-year decrease of 0.1 percentage points.
3. Net Profit Margin#
Net Profit Margin = Net Profit / Operating Revenue, representing the actual profit after deducting all costs and expenses. A high gross margin that is eroded by management or sales expenses can lead to an unsatisfactory net profit margin. Buffett believes that the net profit margin should be greater than 5%.
Taking Kweichow Moutai for 2023 and 2024 as an example, the net profit margins are 49.5% and 51.2%, respectively, a year-on-year increase of 1.7 percentage points, suggesting that management or sales expenses may have decreased.
The above are three key criteria for Buffett's stock selection, but company analysis also includes other indicators such as price-to-earnings ratio and differentiation.
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