How Average People Can Analyze Stocks Like Warren Buffett
How Warren Buffett Rapidly Evaluates Stocks
When choosing investments, Warren Buffett typically filters companies through meticulous financial statement analysis. As recounted in Tap Dancing to Work, when queried about his idea sources, Buffett responded: "Simply through reading. My daily work revolves around constant reading."
By studying annual reports and examining core financial metrics, Buffett performs initial company assessments.
1. Return on Equity (ROE)
This indicator measures capital utilization efficiency. Calculated as ROE = Net Profit / Average Shareholder’s Equity, it can be decomposed via DuPont Analysis into: ROE = Net Profit Margin × Asset Turnover × Financial Leverage. As a comprehensive performance gauge, Buffett requires ROE above 15%. (Analysis based on Kweichow Moutai’s 2023-2024 reports.)
Illustration: Moutai achieved 34.19% (2023) and 36.02% (2024) ROE, showing a 2-point rise. Excluding substantial idle cash reserves, its 2024 adjusted ROE approached 50%, indicating potential two-year capital recovery.
2. Gross Profit Margin
Gross Margin = (Revenue – Production Costs) / Revenue. This reveals product profitability potential. For instance, a ¥100 product costing ¥40 yields 60% margin. Buffett targets >40% margins, signaling product differentiation, economic moat strength, and risk resilience.
China's liquor sector exhibits high margins. Moutai maintained 92.11% (2023) and 92.01% (2024), with a marginal 0.1-point annual dip.
3. Net Profit Margin
Net Margin = Net Profit / Revenue, reflecting true profitability after all expenses. High gross margins can erode if administrative or marketing costs balloon. Buffett favors >5% net margins.
Moutai’s net margins rose from 49.5% (2023) to 51.2% (2024), a 1.7-point increase, suggesting optimized expense management.
These represent three pillars of Buffett’s selection framework, though comprehensive analysis includes P/E ratios and competitive advantages.
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