Education

How To Choose Which Stocks to Buy and Hold Long-Term (Part 2)?

warren buffett 2

In the last part, we talked about what Warren Buffett looks for in an income statement in order to determine whether a company has long-term competitive advantage.

Here are what Warren Buffett looks for when interpreting a balance sheet:

  • Positive if the company hold a lot of cash, short-term investments and has little or no debt
  • Positive competitive advantage when a company has low percentage of net receivables to gross sales
  • Positive when the current ratio of a company is greater than 1; bad when current ratio is less than 1
  • Increase in goodwill over a number of years means company has been buying out other businesses.  It is even better if the company is buying other companies that have durable advantage.
  • Lower the return on asset ratio the better the competitve advantage
  • A debt to shareholders’ equity ratio lower than 0.80 mean the company has positive long-term competitve advantage
  • Companies that have durable competitive advantage tend not to have any preferred stocks
  • The more earnings the a company retains, the faster it grows its retained earnings pool, which in turn will increase growth rate for future earnings
  • The presence of treasury shares on the balance sheet and a history of buying back shares are good indicators that the company has a durable competitive advantage
  • Companies that benefit from a durable or long-term competitive advantage show higher-than-average return on shareholders’ equity

Lastly, this is what any investor should look for in a cash flow statement:

  • Company historically using 50% or less of its annual net earnings for capital expeditures tend to have durable competitive advantage

Again, I will do some analysis on the stocks I am interested in investing in.  I will go over the accounting terms I have mentioned in more details at that time.

Please feel free to comment below! Catch you on the flip side!

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