Buffetology Flashcards
What 3 basic business models should Super companies have?
-selling a unique product
(Coca Cola, proctor and gamble, Philip Morris etc. they own a piece of the consumers minds therefore never have to change their products.)
-selling a unique service
- being low cost buyer and seller of a product or service that the public has an ongoing need for.
How do you get a companies net worth?
Subtract money owed from money in the bank
Debt-to-Asset Ratio and what does it determine?
Long term+short term debt/total assets (tangible + intangible)
Refers to how much of its assets are financed by debt and its ability to meet those obligations.
Higher ration means higher risk (business must generate enough cash flow to service the debt.)
Above .6 is considered risky because money is harder to get money for financing. Creditors lend money because they are certain they will be paid back. Therefore 0-.4 is the best
Determine gross profit/gross profit margin
You get gross profit by subtracting cost of goods sold from revenue.
Gross profit/revenue=gross profit margin
Revenue $10,000
CGS. $3000
—————————-
Gross profit. $7000
$7000/$10000=gpm 70%
What does Buffet consider good gross margins and why does he favor these companies?
He found companies with great economics that he can profit from have very high gross profit marginsS. Companies buffet owns: Coca-Cola 60% Moody’s 73% Northern Santa Fe railway 61% Weigels Co. 51%
What does a high gross profit margin represent?
It represents the companies durable competitive advantage which allows the freedom to price the products and services. Without this competitive advantage companies need to compete by lowering the price of their product.
What GPM shows a competitive advantage and which does not?
40% or better GPM tends to represent a durable competitive advantage
20% and below is usually indication of fierce competition in the industry
Where does Warren keep a close eye?
Operating expenses
What makes up direct and indirect selling expenses?
(SGA)
Selling and General Expenses
We need to see what the “consistent” spending is.
Management salaries Advertising Travel costs Legal fees Commissions Payrolls Etc.
What would happen if intel stopped its R&D?
In tech. It’s so competitive that it would be obsolete in a decade.
Why does Goodyear tire drag into the red every recession?
With a high SGA expenses to gross profit it’s high capital expenenditures and interest expenses-from the debt used to finance its capital expenditures
Of it didn’t add debt to make all those capital expenditures it wouldn’t stay competitive for long.
What’s warrens hot spot for a durable competitive advantage holders in consumer products?
Payouts if 15% or less of operating income.
Gain (or loss) on sale of assets and other
When a company sells an asset (other than inventory) the profit or loss for the sale is recorded under gain (or loss)
Non recurring
Explain the reason behind Buffets Washington Post Power Supply System
His $139 mil shares of tax-free bonds paid him $22 million a year in tax-free interest. His reasoning was that an after tax $22 mil was like a $45 mil pretax investment which would have cost him $250-300 mil.
Therefore he was saw his acquisition of bonds at a 50% discount relative to the value of what other businesses with similar economics were selling for.
What does warren buffet look at in the income statement?
He looks at the ratio between the gross revenue and net earnings.
A company with $2 nil net on $10 bil gross
Is 20%
While one that
Nets $5 bil to 109 bil only has 5%
