Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage Paperback – January 1, 2011

Simple and straight to the point lessons on patterns in statements. No TA required.

I gave this book five stars, but if I could more stars I most definitely would have! If was direct and to the point, while explaining perfectly the concepts and rules as Warren Buffett analyses a company’s financial statements. Adding insight when to look at details of past financial performance. I read it in a few hours due to not being able to put it down. Thank you for sharing the depth and breathe of Warren’s interpretation of a company’s financial statements to identify those companies with a durable competitive advantage! EXCELLENT JOB!!

As an MBA student, I already have gone through Financial Accounting in school that's why I'll give this book 4 stars (super conservative, deserves a 5 though for those that are not aware of the financial statements). However, I loved the approach of this book towards the margins of expenses. I also used the MSN screener as suggested which is an amazing tool I wasn't using.For people interesting in a summary I'll post below the key takeaways for all the statements + the valuation.Income Statement:Margins: Gross profit margin more than 50%-60%SG&A to Gross profit have to be consistent!! Either high (50%-60%) or low (30%).Net Earning to revenues = 20%+Interest payout less than 15%Low depreciation expense to gross profits. 10%Low R&D costs 10%10-year growth in epsBalance Sheet:For manufacturing consistent growth in inventory.Lower percentage of net receivables to its competitors=collects more frequently money.Most companies with competitive advantage have current ratio below 1 = they earning power is so strong they can cover their current liabilities and pay generous dividends and stock repurchases that diminish cash. Current ratio is not an indicator of competitive advantage.Property plant and equipment: no frequent updates/re purchases before it wears out, to keep up. Finance new plants internally.Businesses with a competitive advantage never sell below their book value because of good will. If good will stays the same that means the company is not making new acquisitions or they are paying under the book value for a business. When businesses sell below book value with an increasing goodwill it’s a lifetime opportunity.Intangibles: brand names of Coca Cola are not carried as assets on they balance sheet. Long-term earnings power.Log-term investments: cost or market price, which ever is lower.Return on assets: more could be less in the long term. Moodys 1.5B and 45% return can be taken over if the capital is raised. But $43B and 12 of Coca Cola is an impossible task.Low to no long-term debt. Sufficient net earnings to pay all of the long-term debt within 3 to 4 years.Minority Interest: represents the excess percentage of a business we own more than 80%. If we purchase more than 80% of the business we merge their balance sheet with ours. In this case, the 20% remaining value will be carried under minority interest to balance the equation.Debt to equity below 1: the lower the better. If it’s negative they spend all the shareholders equity to buy back shares = tremendous earnings power. Add the treasury stock back to stockholders equity.No preferred stock = strong earningsGrowth in retained earnings 7% or more constant over 5 years.Net earnings / shareholders equity = 30% not competitive industry. ROENegative shareholders equity:* Companies going bankrupt: negative net and sh. equity* Companies so profitable don’t need to retain earnings. Positive net and negative sh .eqCash-flow statementLow or No having capital expenditures= less than 20% Total 10 year Capex / Total 10 year net earning = less that 50% needs more research less that 25% is amazing.Historical share repurchases: “issuance (retirement) of stock, Net”ValuationThe “bond” is the company’s equity/shares and “coupon payments” the pre-tax earnings not dividends.Stock price: $6.50 a sharePre tax earnings: $.70 a shareAfter tax: $.46 a shareHistorical (10 year) Annual rate earnings:15%Bought an equity “bond” with pre-tax interest rate of 10.7% on his $6.5 investment.Long-term interest rates at 6.5% and pre-tax / coupon payments of $54 a share, would be worth $830 a share. And was selling for $726-$885.

Great concise volume

Very practical info. Just do the work.

This is a great starting point to learn how to read the financial statements of a company. It was very easy to read through, took me only 4 days to finish. I'd recommend to the reader to pull up the financial statements of any company that they're interested in and read their statements as you go through this book as it will make good initial practice on determining if the company has a durable competitive advantage or not.

The writing is very simple and to the point. I have read a lot of finance books and I would categorize this one as a must read for investors. If you are on the fence I would suggest purchasing it. It goes through the income statement, balance sheet and cash flow statement and gives some of what the Oracle of Omaha looks for.

I'm glad I bought this book. Not for the explanation of basic accounting as there were numerous errors. I'm a CPA and spotted these all throughout the book.The real value of this book was 3 takeaways of Warren's philosophy which were invaluable (to me at least). Even though I shared the same outlook, this helped me synthesis my thoughts on the subject much more clearly. It won't change my investment thesis (as that already aligns with Warren), but it will help me review potential investments with much more clarity and focus.