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Warren Buffet and the Interpretation of Financial Statement - Coggle…

- - - - selling, general and administrative expenses (SGA)
      - Research & development
        
        Companies that have to spend heavily on R&D have an inherent flaw in their competitive advantage that will always put their long-term economics at risk, which means they are not a sure thing.
      - Depreciation
        
        What Warren has discovered is that companies that have a durable competitive advantage tend to have lower depreciation costs as a percentage of gross profit than companies that have to suffer the woes of intense competition.
      - Interest expenses
        
        As a rule, Warren’s favorite durable competitive advantage holders in the consumer products category all have interest payouts of less than 15% of operating income.
        
        The rule here is real simple: In any given industry the company with the lowest ratio of interest payments to operating income is usually the company most likely to have the competitive advantage.
    - - A simple rule (and there are exceptions) is that if a company is showing a net earnings history of more than 20% on total revenues, there is a real good chance that it is benefiting from some kind of long-term competitive advantage.
      - if a company is consistently showing net earnings under 10% on total revenues it is—more likely than not—in a highly competitive business in which no one company holds a durable competitive advantage.
  - - - current assets
        
        cash and cash equivalent
        
        that a company has a competitive advantage that is generating tons of cash
        
        ways to create cash
        
        sell new bonds or equity
        
        has an ongoing business that generates more cash than the business burns.
        
        sell an existing business or other assets that the company owns,
        
        Inventory
        
        a durable competitive advantage have an advantage, in that the products they sell never change and therefore never become obsolete.
        
        property/plant and equipment
        
        is not a product that changes much so no need to update plant
        
        intangible assets (patents, copyrights, trademarks..)
        
        long-term investment (stocks, bonds, real estate)
      - other assets
    - - retained earning
        
        the more earnings that a company retains, the faster it grows its retained earnings pool, which, in turn will increase the growth rate for future earnings.
      - return on shareholder's equity
        
        High returns on shareholders’ equity means “come play.” Low returns on shareholders’ equity mean “stay away.”
      - leverage
        
        Warren has learned to avoid businesses that use a lot of leverage to help them generate earnings. In the short run they appear to be the goose that lays the golden eggs, but at the end of the day, they are not.
  - - - not having them is one of the secrets to getting rich
      - Warren has discovered that if a company is historically using 50% or less of its annual net earnings for capital expenditures, it is a good place to look for a durable competitive advantage. If it is consistently using less than 25% of its net earnings for capital expenditures, that scenario occurs more than likely because the company has a durable competitive advantage working in its favor.
- - - - sometimes company can do stupid thing but the problem must solvable