Dump: Warren Buffett Accounting Book: Reading Financial Statements for Value Investing

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Title: Warren Buffett Accounting Book: Reading Financial Statements for Value Investing
Authors: Stig Brodersen, Preston Pysh
Edition: 1
Finished Date: 2014-03-19
Rating: 5
Language: English
Genres: Finance, Stocks
Level: Entry
Publishers: Pylon Publishing
Publication Date: 2014-04-28
ISBN: 978-1939370150
Format: azw3
Pages: 256
Download: azw3
  • interest rates work like gravity.
  • inflation
  • bond: If inflation is low and interest rates are high, bond; else stock.

the 3 most important report

1. income statement: how much profit the company has made in one year: Net income

Calculation income statement in millions
1 Revenue 13,279
2 cost of revenue 5,348
1-2=3 Gross Margin 7,931
4 Sales and Marketing expenses 1,105
5 Research and development expenses 863
6 General and administration expenses 558
7 Other operating expenses 1,350
4+5+6+7=8 Operating expenses 3,856
3-8=9 Income from operations 4,075
10 Net interest income/(expenses) (135)
11 Extraordinary income/(expenses) 275
12 Income taxes 1,352
9+10+11-12=13 Net income 2,863

2. balance sheet: how much am I really worth: book value = equity = Assets - Liabilities

Assets

Liabilities

equity = Assets - Liabilities

Calculation Assets in millions
1 Cash and cash equivalents 1,847
2 Accounts receivable 3,897
3 Inventory 638
4 Other current assets 638
5 Prepaid expenses 285
1+2+3+4+5+6 Total current assets 9,153
7 Non-current receivables 1,811
8 Non-current investments 2,768
9 Property, plant, and equipment 8,292
10 Patents, trademarks, and other intangibles 1,827
11 Goodwill 3,235
7+8+9+10+11=12 Total non-current assets 17,933
6+12=13 Total assets 27,086
Calculation Liabilities in millions
1 Accounts payable 2,183
2 Notes payable 498
3 Accrued expenses 854
4 Taxes payable 427
1+2+3+4=5 Total current liabilities 3,962
6 Long term debt 3,211
7 Deferred tax 1,242
8 Provisions 273
6+7+8=9 Total non-current liabilities 4,726
5+9=10 Total liabilities 8,688
11 Share capital 400
12 Additional paid in capital 3,261
13 Retained earnings 15,590
14 Treasury stocks -853
11+12+13+14=15 Total equity 18,398
10+15=16 Total liabilities and equity 27,086

3. cash flow statement

Calculation Cash Flow in millions
1 Net Income 2,863
2 Depreciation 516
3 Other non-cash items 264
4 Deferred taxes 287
5 Working capital -832
1+2+3+4+5=6 Cash flow from operating activities 3,098
7 Property, plant, and equipment, net -1,349
8 Intangible assets, net -214
9 Businesses, net 86
10 Investments, net -176
7+8+9+10=11 Cash flow from investing activities -1,653
12 Insurances of common stock 98
13 Purchase of stock for treasury -326
14 payment of cash dividends -682
15 Insurances/payment of debt(net) -120
12+13+14+15=16 Cash flow from financing activities -1,030
6+11+16=17 Change in cash 415
18 Cash and equivalents, start of period 1,432
17+18=19 Cash and equivalents, end of period 1,847
  • Principal 1: Vigilant leaders

    • Rule 1: Low debt: debt-to-equity (D/E) ratio <= 0.5
    • Rule 2: High current ratio = current assets/current liabilities 1.5-2.5

      • current asset: something that can be turned into cash within the next twelve months
      • current liability: something that should be paid within the next twelve months

      Companies receive $1.5 every time a debt of $1 must be paid within the next twelve months.

      If a company always receives more cash than it pays out, the company can meet its short-term debt obligations at any time.

      • If the ratio is below 1, often the company would have to acquire new debt to pay off the existing debt obligations. This postpones and accumulates problems.

      • a higher current ration: bad money management due to an inability to collect payment from vendors.

    • Rule 3: Strong and consistent return on equity (ROE) = Net Income / Equity should have had a consistent ROE of above 8% over the last ten years
      the ability to reinvest profits in the business

    • Rule 4: Appropriate management incentives

  • Principle 2: A company must have long-term prospects

    • Rule 1: persistent products
      • not change due to technology
    • Rule 2: minimize taxes
  • Principle 3: A company must be stable and understandable
    • Rule 1: stable book value growth from the owner’s earnings
    • Rule 2: sustainable competitive advantage
  • Principle 4: buy at attractive prices

    • Rule 1 : Keep a wide margin of safety to the intrinsic value
    • Rule 2: Low price-earnings ratio P/E < 15
    • Rule 3: Low price-to-book ratio P/B = market price per share/book value per share < 1.5
    • Rule 4: Set a safe discount rate
      PV: present value or intrinsic value today
      PF: future value: discount rates: number of Years
      i: earn a return rate annually
      n: number of years
      $FV = PV(1+i)^n$

      $PV = \frac{FV}{(1+i)^n}$

      Example: PV = $100/(1+0.03)^10 = $74.41

    • Rule 5: Buy undervalued stocks: Determine intrinsic value
    • Rule 6: the right time to sell your stocks
Equity 100
Debt 0
Earnings 10
D/E 0.00
ROE 10.0%
Years EPS Dividend Book Value ROE
Now 10.00
1 1.00 0.20 10.80 9.3%
2 1.20 0.22 11.78 10.2%
3 1.40 0.24 12.94 10.8%
4 1.50 0.26 14.18 10.6%
5 1.50 0.28 15.40 9.7%
6 1.70 0.30 16.80 10.1%
7 1.80 0.32 18.28 9.8%
8 2.10 0.34 20.04 10.5%
9 2.10 0.36 21.78 9.6%
10 2.40 0.38 23.80 10.1%
EPS 16.70
Dividends 2.9
Owners’ earnings 13.8