Discovering persistent competitive advantages of companies through financial reports-reading Mary Buffett and David Clark Buffett teach you to read earnings

Some people like Playboy, while I like annual reports. -- Warren Buffett

Recently, I have discussed this with my colleagues at the Buffett Club: How do you think Benjamin Graham's "strange thoughts" about visiting the management of a listed company "? I think from another perspective, this is also a "great idea", because he thinks this means "deception", and he wants "to be an opponent, even a little guy, in an equal arena, use the information that anyone can obtain. ", What he calls "a little bit of information" mainly refers to financial reports.

Graham is the father of financial analysis. He created the basic framework and principles of financial analysis and the career of financial analysis. As a proud and well-known man, Buffett's financial analysis efforts are naturally amazing. He never did the so-called "due diligence" because he believes that the most important thing is to buy the right business at the right price and select the right partner. He is most concerned with the company's persistent competitive advantages, while "due diligence" does not actually investigate the company's persistent competitive advantages, however, financial statements reveal the clues of "lasting competitive advantage.
Strictly speaking, this "Buffett teaches you to read financial reports" is Buffett's former daughter-in-law, Mary Buffett, and Buffett's expert David Clark, who teaches you to read financial reports. The core of the explanation is to follow Buffett's ideas, just like a detective, to "detect" the persistent competitive advantages of Buffett's most valued companies.
Buffett's ability to become the richest man in the world relies on two major discoveries: one discovery is how to identify high-quality enterprises with lasting competitive advantages. Buffett compared these companies with persistent competitive advantages to "Super Stars". They are essentially three basic business models: either the seller of a particular commodity (such as Coca-Cola, Procter & Gamble, or budway ), either the seller of a special service (such as Wells Fargo, Moody's, or American Express ), either it is the unity of sellers with low-cost buyers who have continuous demand for goods or services (such as Walmart, many supermarkets in the good city, and the NEB household supermarket ).
Regardless of the model, the "continuity" of the competitive advantage is the key. Mary Buffett called it "Buffett's key to opening the vault ". Taking the Coca-Cola company as an example, the same product has been sold in the past 122, and there is no need to spend a huge amount of money to develop new products and update plant equipment. The consistency of products leads to continuous profit stability, as a result, shareholders are becoming richer and richer.
Another discovery is how to estimate the value of a quality enterprise with a persistent competitive advantage. In the end of 1980s, Buffett proposed the concept of "equity bonds" for the first time in a speech at Columbia University: A company with persistent competitive advantages, with strong and predictable profit growth, turning its stock into an "equity bond" with increasing interest rates ". This kind of bond is the company's stock, and its "Interest Rate" is the company's pre-tax profit (not the company's dividend ). Unlike ordinary bonds, the interest rate of equity bonds is not fixed, but is growing year after year. The value of stock bonds naturally keeps rising, the market value is approximately equal to the pre-tax earnings per share divided by the long-term corporate bond interest rate.
Both of Buffett's findings are inseparable from viewing financial statements. The method is somewhat similar to Sherlock Holmes's method of solving the case: Collect all the facts as much as possible, then sit down and think and reason, smoke two cigarettes, pull the violin, the mountains are hard to answer questions, and then the darkness is shining, the answer popped up. However, Sherlock Holmes's answer is the truth and the murderer of the case, while Buffett's answer is the company's persistent competitive advantage and internal value.
This book introduces and analyzes the income statement, balance sheet, and cash flow statement items one by one, and strives to summarize the golden rule that Buffett uses to "detect" the company's persistent competitive advantage.
Buffett focused on mining from the income statement whether the company needs to rely on a large amount of research and development to maintain competitiveness, whether it needs to use financial leverage to obtain profit and other information, to analyze the way the company gets profit, determine the motive force behind economic growth. The source of profit is more meaningful than the profit itself. When Buffett analyzed the income statement, focuses on the gross profit rate, sales expense and general management expense proportion of gross profit, R & D expense, depreciation expense, interest expense, pre-tax profit, net profit and earnings per share, the experience of some of these indicators is of great reference value to our analysis of listed companies in China. For example, the gross profit rate is a key indicator for Buffett to seek long-term profit. The gross profit rate of a company with a persistent competitive advantage can be kept at 40% or above for a long time, the proportion of sales expenses and general management expenses to gross profit should be kept below 30%, and the proportion of net profit to total income should be kept above 20% (not listed by banks and financial companies, if such companies encounter exceptionally high net profit margins, it usually means that their risk management departments are lax .) And so on.
The vast majority of the fourteen indicators that should be focused on assets and liabilities are more or less able to provide evidence of the company's persistent competitive advantage. Therefore, when trying to determine whether a company has a persistent competitive advantage, Buffett first checks the company's assets (including cash and property ), how much debt is assumed (including the company's payables to suppliers, bank loans and bonds), separate analysis and summary analysis of each subject one by one, and calculate several important financial indicators, such as the current rate, return on assets, debt/equity ratio, and return on shareholder equity, to determine the company's asset quality, operating efficiency, financial risks, and the quality and continuity of the company's competitive advantages, avoid possible scams and traps.
For the cash flow statement, Buffett is most concerned with two indicators: capital expenditure and stock repurchase. "If a company keeps the ratio of its net profit to capital expenditures below 50%, You can include it in the list of candidates for companies with persistent competitive advantages. If the proportion remains below 25%, the company is likely to have a sustainable competitive advantage .". If a company buys shares frequently, it is likely to be a company with a persistent competitive advantage, because only such companies have sufficient funds to repurchase shares.
The persistent Competitive Advantage of the company is detected through financial reports. It is the most unique feature of Buffett, who surpasses Graham, and distinguishes it from other investment experts. It is also the characteristic and value of this book. In the United States, the author did not leave aside the specific subjects of financial statements. He introduced and discussed an important concept that Buffett often uses in financial analysis and Value Evaluation: "Owner benefits. Without understanding this important concept, the report income shown in the income statement may still be a smoke bullet for investors. This is a pity.