How Does Buffett Quickly Analyze a Stock?#
When selecting stocks, Buffett typically filters companies by analyzing financial statements. In the book "Working with a Tap Dance," when asked about his source of inspiration, Buffett replied, "My daily work is reading." He conducts preliminary screenings by reading annual reports and analyzing specific financial metrics.
1. Return on Equity (ROE)#
Return on equity measures a company's efficiency in using capital, with the formula ROE = Net Profit / Average Net Assets. Through DuPont analysis, ROE can be broken down into net profit margin, asset turnover, and financial leverage, reflecting the overall operational status of the company. Buffett requires an ROE of over 15%. (Analysis based on Kweichow Moutai's 2023 and 2024 financial reports.)
Taking Kweichow Moutai as an example, the ROE for 2023 and 2024 is 34.19% and 36.02%, respectively, an increase of 2 percentage points. Given that the company holds a large amount of idle cash, the ROE after cash deduction in 2024 may reach around 50%, indicating that Moutai could recover its investment costs within two years.
2. Gross Margin#
The formula for gross margin is (Operating Revenue - Operating Cost) / Operating Revenue, reflecting the profit space of a product. For example, a product priced at 100 yuan with a cost of 40 yuan has a gross margin of 60%. Buffett prefers companies with a gross margin above 40%, as this indicates a unique product advantage, a wide economic moat, and strong risk resistance.
The Chinese liquor industry generally has high gross margins, with Moutai's gross margins for 2023 and 2024 being 92.11% and 92.01%, respectively, a year-on-year decrease of 0.1 percentage points.
3. Net Profit Margin#
The formula for net profit margin is Net Profit / Operating Revenue, representing the actual profit after deducting all costs. A high gross margin can be eroded by high management or sales expenses, leading to a low net profit margin. Buffett requires a net profit margin above 5%.
Moutai's net profit margins for 2023 and 2024 are 49.5% and 51.2%, respectively, a year-on-year increase of 1.7 percentage points, indicating that management or sales expenses may have decreased.
These are three key criteria Buffett uses for stock selection, but company analysis also includes factors like price-to-earnings ratio and differentiation.
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