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Strategies & Market Trends : Fundamental Value Investing

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From: bruwin	11/12/2014 3:54:04 PM
	6 Recommendations Recommended By apatel1 Harshu Vyas IntoOLEDs Sergio H The Ox and 1 more member of 4719

BUFFETT’S COMPANY ANALYSIS TEMPLATE. Below is a Summary of what Warren Buffett targets in a company’s three Financial Statements and his use of his Equity Bond Theory in order to evaluate a company and to determine a preferable purchase price. In my opinion, one could regard all these requirements as a form of COMPANY ANALYSIS TEMPLATE with which an Industrial type company should comply in order to satisfy Buffett’s Investment Criteria, which should, in turn, lead to a profitable long-term investment. _______________________________________________________________ INCOME STATEMENT. GROSS PROFIT :- Gross Profit Margin = (Revenue-Cost of Sales)/Revenue >40% SG&A EXPENSES :- SG&A < 30% x Gross Profit R&D EXPENSES :- Little or Nil DEPRECIATION :- Depreciation < 10% x Gross Profit INTEREST EXPENSE :- Interest Expense < 15% x Operating Income (i.e. EBIT) PRETAX INCOME :- VERY IMPORTANT NUMBER, especially for previous 12 months NET EARNINGS :- Net Earnings > 20% x Total Revenue EARNINGS PER SHARE :- 10 Year Trend showing Consistency & Upward Trend _______________________________________________________________ BALANCE SHEET. ASSETS. CASH & SHORT TERM INVESTMENTS :- Ongoing increase from Business Operations NOT from One-Time events INVENTORY :- Corresponding Rise in both Inventory & Net Earnings CURRENT RATIO :- Current Assets/Current Liabilities < 1, due to Strong Earning Power PROPERTY, PLANT & EQUIPMENT :- Low as possible LONG TERM INVESTMENTS :- Large as possible. Should be Quality Investments, preferably in other DCA companies RETURN ON ASSETS (ROA) :- High BUT with Large Total Assets to reduce Vulnerability LIABILITIES. SHORT TERM DEBT :- Avoid bigger borrowers of Short Term money rather than Long term money LONG TERM DEBT DUE :- Little or Nil LONG TERM DEBT :- Long Term Debt < 3 x Annual Net Earnings DEBT/SHAREHOLDER’S EQUITY :- Debt/S.H.Equity < 0.8 where S.H.Equity INCLUDES Value of Treasury Stock PREFERRED STOCK :- Nil RETAINED EARNINGS :- Annual Increase > 7% TREASURY STOCK :- Should appear and be regularly purchased RETURN ON SHAREHOLDER’S EQUITY (ROE) :- Net Income/S.H.Equity > 25% _______________________________________________________________ CASH FLOW STATEMENT. INVESTING OPERATIONS :- Based on +/-10 Year Period, Capital Expenditure/Net Earnings < 50% For DCA company this ratio is consistently < 25%. FINANCING ACTIVITIES :- “Issuance (Retirement) of Stock, Net” to be a regular NEGATIVE Value. This indicates a NET Buying Back of its own Shares compared to a NET Issuance of its Shares. _______________________________________________________________ BUFFET’S EQUITY BOND. THE THEORY. Companies with DURABLE COMPETITIVE ADVANTAGE (DCA) can be seen as an EQUITY BOND with a COUPON. Equity Bond = Share Price Bond Coupon = Pretax Earnings/Share DETERMINE SHARE PRICE. Stock Market will price a DCA company’s Equity Bond at a level that approximately reflects the Value of its Earnings RELATIVE to the Yield on LONG TERM CORPORATE BONDS (LTCB) Equity Bond = Share Price = Coupon Rate/Long Term Corporate Bond Rate (LTCBR) Coupon Rate/LTCBR = Pretax Earnings/LTCBR WHEN TO BUY. (1) Buy during Bear Markets or when share prices are depressed due to no fault of the company (2) Buy when Share Price < Pretax Earnings per Share/LTCBR by a reasonable discount WHEN TO SELL. (1) Sell when presented with a BETTER company at a BETTER Price (2) Sell when a current DCA company is losing its Durable Competitive Advantage (3) Sell during Bull Markets or when prices are at unrealistically HIGH levels (4) Sell when P/E ratios > 40+, especially if the stock’s price far EXCEEDS THE LONG-TERM ECONOMIC REALITIES OF THE BUSINESS

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