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!

13 thoughts on “How To Choose Which Stocks to Buy and Hold Long-Term (Part 2)?”

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s