Business Infographics on LinkedIn: Warren Buffett’s Income Statement Rules of Thumb Credits to Brian… (2024)

Absolutely, Buffett's income statement filters are incredibly valuable for uncovering hidden gems. Personally, these other matrices strike me: 1. Operating cash flow margins - Powerful indicator of true profitability. 10% or better piques my interest here. 2. Inventory turnover - For non-service businesses especially. Anything 4x or faster annually suggests efficient operations. 3. Accounts receivable - Likewise, quick collection cycles (under 50 days) mean smooth cash flows

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Warren Buffett’s Income Statement Rules of ThumbOriginal Content Creator: Brian Feroldi (give him a follow)----Warren Buffett’s Income Statement Rules of Thumb:1: Gross Margin🧮 Equation: Gross Profit / Revenue👍 Rule of Thumb: 40% or higher🤔 Buffett's Logic: A consistently high gross margin signals that the company isn’t competing exclusively on price.2: SG&A Margin🧮 Equation: SG&A Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Wide-moat companies don’t need to spend a lot on overhead to operate & get consumers to buy.3: R&D Margin🧮 Equation: R&D Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Buffett doesn't want to own companies that need to constantly invent the next great product to do well.4: Depreciation Margin🧮 Equation: Depreciation / Gross Profit👍 Rule of Thumb: 10% or lower🤔 Buffett's Logic: Buffett doesn't like businesses that constantly need to invest in depreciating assets to maintain their competitive advantage.5: Interest Expense Margin🧮 Equation: Interest Expense / Operating Income👍 Rule of Thumb: 15% or lower🤔 Buffett's Logic: Great businesses have such wonderful economics that they don’t need debt to finance themselves.6: Income Tax Expenses🧮 Equation: Taxes Paid / Pre-Tax Income👍 Rule of Thumb: Current Corporate Tax Rate🤔 Buffett's Logic: Great businesses make so much money that they are consistently forced to pay their full share of taxes.7: Net Margin (Profit Margin)🧮 Equation: Net Income / Sales👍 Rule of Thumb: 20% or higher🤔 Buffett's Logic: Companies that consistently convert 20% of their revenue into net income are more likely to have a durable competitive advantage.8: Earnings Per Share Growth🧮 Equation: Year 2 EPS / Year 1 EPS👍 Rule of Thumb: Positive & Growing🤔 Buffett's Logic: Great companies consistently generate profits and increase them every year regardless of the operating environment.3 Important notes:1⃣ These “rules of thumb” are only useful when a company is mature and fully optimized for profits.2⃣ CONSISTENCY is key. The real test is if a company generates good numbers over multiple years & various economic cycles.3⃣ There are PLENTY of exceptions & nuances to these rules. Many of Buffett’s largest holdings do not pass every rule of thumb. That’s because investing & accounting have TONS of nuances.What "rules of thumb" do you use to make investing decisions?_____________________Original Content Creator: Brian Feroldi (give him a follow)

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Warren Buffett’s Income Statement Rules of Thumb:1: Gross Margin🧮 Equation: Gross Profit / Revenue👍 Rule of Thumb: 40% or higher🤔 Buffett's Logic: A consistently high gross margin signals that the company isn’t competing exclusively on price.2: SG&A Margin🧮 Equation: SG&A Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Wide-moat companies don’t need to spend a lot on overhead to operate & get consumers to buy.3: R&D Margin🧮 Equation: R&D Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Buffett doesn't want to own companies that need to constantly invent the next great product to do well.4: Depreciation Margin🧮 Equation: Depreciation / Gross Profit👍 Rule of Thumb: 10% or lower🤔 Buffett's Logic: Buffett doesn't like businesses that constantly need to invest in depreciating assets to maintain their competitive advantage.5: Interest Expense Margin🧮 Equation: Interest Expense / Operating Income👍 Rule of Thumb: 15% or lower🤔 Buffett's Logic: Great businesses have such wonderful economics that they don’t need debt to finance themselves.6: Income Tax Expenses🧮 Equation: Taxes Paid / Pre-Tax Income👍 Rule of Thumb: Current Corporate Tax Rate🤔 Buffett's Logic: Great businesses make so much money that they are consistently forced to pay their full share of taxes.7: Net Margin (Profit Margin)🧮 Equation: Net Income / Sales👍 Rule of Thumb: 20% or higher🤔 Buffett's Logic: Companies that consistently convert 20% of their revenue into net income are more likely to have a durable competitive advantage.8: Earnings Per Share Growth🧮 Equation: Year 2 EPS / Year 1 EPS👍 Rule of Thumb: Positive & Growing🤔 Buffett's Logic: Great companies consistently generate profits and increase them every year regardless of the operating environment.3 Important notes:1⃣ These “rules of thumb” are only useful when a company is mature and fully optimized for profits.2⃣ CONSISTENCY is key. The real test is if a company generates good numbers over multiple years & various economic cycles.3⃣ There are PLENTY of exceptions & nuances to these rules. Many of Buffett’s largest holdings do not pass every rule of thumb. That’s because investing & accounting have TONS of nuances.What "rules of thumb" do you use to make investing decisions?Follow Long Term Mindset for more posts like this.***Want to master the basics of accounting (for free)?Enroll in our free, 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eKbRV7g6If this post was helpful, repost it ♻️ to share with your audience.

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This is very enlightening 📝"The rule of thumb applies only to mature companies where profits are already fully optimised”It is important to note this as the same metric cannot accurately gauge the financial performance of thriving businesses.

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Warren Buffett’s Income Statement Rules of Thumb:1: Gross Margin🧮 Equation: Gross Profit / Revenue👍 Rule of Thumb: 40% or higher🤔 Buffett's Logic: A consistently high gross margin signals that the company isn’t competing exclusively on price.2: SG&A Margin🧮 Equation: SG&A Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Wide-moat companies don’t need to spend a lot on overhead to operate & get consumers to buy.3: R&D Margin🧮 Equation: R&D Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Buffett doesn't want to own companies that need to constantly invent the next great product to do well.4: Depreciation Margin🧮 Equation: Depreciation / Gross Profit👍 Rule of Thumb: 10% or lower🤔 Buffett's Logic: Buffett doesn't like businesses that constantly need to invest in depreciating assets to maintain their competitive advantage.5: Interest Expense Margin🧮 Equation: Interest Expense / Operating Income👍 Rule of Thumb: 15% or lower🤔 Buffett's Logic: Great businesses have such wonderful economics that they don’t need debt to finance themselves.6: Income Tax Expenses🧮 Equation: Taxes Paid / Pre-Tax Income👍 Rule of Thumb: Current Corporate Tax Rate🤔 Buffett's Logic: Great businesses make so much money that they are consistently forced to pay their full share of taxes.7: Net Margin (Profit Margin)🧮 Equation: Net Income / Sales👍 Rule of Thumb: 20% or higher🤔 Buffett's Logic: Companies that consistently convert 20% of their revenue into net income are more likely to have a durable competitive advantage.8: Earnings Per Share Growth🧮 Equation: Year 2 EPS / Year 1 EPS👍 Rule of Thumb: Positive & Growing🤔 Buffett's Logic: Great companies consistently generate profits and increase them every year regardless of the operating environment.3 Important notes:1⃣ These “rules of thumb” are only useful when a company is mature and fully optimized for profits.2⃣ CONSISTENCY is key. The real test is if a company generates good numbers over multiple years & various economic cycles.3⃣ There are PLENTY of exceptions & nuances to these rules. Many of Buffett’s largest holdings do not pass every rule of thumb. That’s because investing & accounting have TONS of nuances.What "rules of thumb" do you use to make investing decisions?----------------------------------------------------------------------------P.S. Want to go deeper into analyzing financial statements? Join me for a FREE webinar on 12/19/2023: The Investor's Guide To Financial Statements.RSVP here (it's free!): https://lnkd.in/etqqtJq7

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Warren Buffett’s Income Statement Rules of Thumb:1: Gross Margin🧮 Equation: Gross Profit / Revenue👍 Rule of Thumb: 40% or higher🤔 Buffett's Logic: A consistently high gross margin signals that the company isn’t competing exclusively on price.2: SG&A Margin🧮 Equation: SG&A Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Wide-moat companies don’t need to spend a lot on overhead to operate & get consumers to buy.3: R&D Margin🧮 Equation: R&D Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Buffett doesn't want to own companies that need to constantly invent the next great product to do well.4: Depreciation Margin🧮 Equation: Depreciation / Gross Profit👍 Rule of Thumb: 10% or lower🤔 Buffett's Logic: Buffett doesn't like businesses that constantly need to invest in depreciating assets to maintain their competitive advantage.5: Interest Expense Margin🧮 Equation: Interest Expense / Operating Income👍 Rule of Thumb: 15% or lower🤔 Buffett's Logic: Great businesses have such wonderful economics that they don’t need debt to finance themselves.6: Income Tax Expenses🧮 Equation: Taxes Paid / Pre-Tax Income👍 Rule of Thumb: Current Corporate Tax Rate🤔 Buffett's Logic: Great businesses make so much money that they are consistently forced to pay their full share of taxes.7: Net Margin (Profit Margin)🧮 Equation: Net Income / Sales👍 Rule of Thumb: 20% or higher🤔 Buffett's Logic: Companies that consistently convert 20% of their revenue into net income are more likely to have a durable competitive advantage.8: Earnings Per Share Growth🧮 Equation: Year 2 EPS / Year 1 EPS👍 Rule of Thumb: Positive & Growing🤔 Buffett's Logic: Great companies consistently generate profits and increase them every year regardless of the operating environment.3 Important notes:1⃣ These “rules of thumb” are only useful when a company is mature and fully optimized for profits.2⃣ CONSISTENCY is key. The real test is if a company generates good numbers over multiple years & various economic cycles.3⃣ There are PLENTY of exceptions & nuances to these rules. Many of Buffett’s largest holdings do not pass every rule of thumb. That’s because investing & accounting have TONS of nuances.What "rules of thumb" do you use to make investing decisions?Follow meBrian Stoffelfor more content like this***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) →https://lnkd.in/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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Very damn useful for stock investors.

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Warren Buffett’s Income Statement Rules of Thumb:1: Gross Margin🧮 Equation: Gross Profit / Revenue👍 Rule of Thumb: 40% or higher🤔 Buffett's Logic: A consistently high gross margin signals that the company isn’t competing exclusively on price.2: SG&A Margin🧮 Equation: SG&A Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Wide-moat companies don’t need to spend a lot on overhead to operate & get consumers to buy.3: R&D Margin🧮 Equation: R&D Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Buffett doesn't want to own companies that need to constantly invent the next great product to do well.4: Depreciation Margin🧮 Equation: Depreciation / Gross Profit👍 Rule of Thumb: 10% or lower🤔 Buffett's Logic: Buffett doesn't like businesses that constantly need to invest in depreciating assets to maintain their competitive advantage.5: Interest Expense Margin🧮 Equation: Interest Expense / Operating Income👍 Rule of Thumb: 15% or lower🤔 Buffett's Logic: Great businesses have such wonderful economics that they don’t need debt to finance themselves.6: Income Tax Expenses🧮 Equation: Taxes Paid / Pre-Tax Income👍 Rule of Thumb: Current Corporate Tax Rate🤔 Buffett's Logic: Great businesses make so much money that they are consistently forced to pay their full share of taxes.7: Net Margin (Profit Margin)🧮 Equation: Net Income / Sales👍 Rule of Thumb: 20% or higher🤔 Buffett's Logic: Companies that consistently convert 20% of their revenue into net income are more likely to have a durable competitive advantage.8: Earnings Per Share Growth🧮 Equation: Year 2 EPS / Year 1 EPS👍 Rule of Thumb: Positive & Growing🤔 Buffett's Logic: Great companies consistently generate profits and increase them every year regardless of the operating environment.3 Important notes:1⃣ These “rules of thumb” are only useful when a company is mature and fully optimized for profits.2⃣ CONSISTENCY is key. The real test is if a company generates good numbers over multiple years & various economic cycles.3⃣ There are PLENTY of exceptions & nuances to these rules. Many of Buffett’s largest holdings do not pass every rule of thumb. That’s because investing & accounting have TONS of nuances.What "rules of thumb" do you use to make investing decisions?----------------------------------------------------------------------------Hi 👋 - thanks for reading!➕ Follow me Brian Feroldi for content that demystifies the stock market. 📖 Want to go deeper? Download a free copy of my eBook, 8 Accounting Terms Explained Simply.https://lnkd.in/epw5_ggqIf you found this post useful, please repost ♻️ to make LinkedIn a better platform for all.

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Credit to Brian FeroldiAugudt 22, 2023Warren Buffett's Income Statement Rules of Thumb:https://lnkd.in/g3epjETg1. Gross Margin● Equation: Gross Profit/ Revenue● Rule of Thumb: 40% or higher● Buffett's Logic: A consistently high gross margin signals that the company isn't competing exclusively on price.2. SG&A Margin● Equation: SG&A Expense / Gross Profit● Rule of Thumb: 30% or lower● Buffett's Logic: Wide-moat companies don't need to opcT spend iu a d 1ol lot on on overhead overhead to to operate operate & & get.consumers to buy .3. R&D Margin● Equation: R&D Expense/ Gross Profit● Rule of Thumb: 30% or lower● Buffett's Logic: Buffett doesn't want to own companies that need to constantly invent the next great.product to do well.4. Depreciation Margin● Equation: Depreciation / Gross Profit● Rule of Thumb: 10% or lower● Buffett's Logic: Buffett doesn't like businesses that constantly need to invest in depreciating assets to.maintain their competitive advantage5. Interest Expense Margin● Equation: Interest Expense / Operating Income● Rule of Thumb: 15% or lower● Buffett's Logic: Great businesses have such wonderful economics that they don't need debt to finance themselves.6. Income Tax Expenses● Equation: Taxes Paid / Pre-Tax Income● Rule of Thumb: Current Corporate Tax Rate● Buffett's Logic: Great businesses make so much money that they are consistently forced to pay their full share of taxes.7. Net Margin (Profit Margin)● Equation: Net Income/ Sales● Rule of Thumb: 20% or higher● Buffett's Logic: Companies that consistently convert 20% of their revenue into net income are morelikely to have a durable competitive advantage8. Earnings Per Share Growth● Equation: Year 2 EPS / Year 1 EPS● Rule of Thumb: Positive & Growing● Buffett's Logic: Great companies consistently generate profits and increase them every year regardless of the operating environment3 Important notes:1. These "rules of thumb" are only useful when a company is mature and fully optimized for profits2. CONSISTENCY is key. The real test is if a company generates good numbers over multiple years & various economic cycles3. There are PLENTY of exceptions & nuances to these rules. Many of Buffett's largest holdings do not pass every rule of thumb. That's because investing & accounting have TONS of nuances

Post 20: What is 'EBITDA' ? Definition:EBITDA, or earnings before interest, taxes, depreciation, and amortization, is an alternate measure of profitability tonet income. By including depreciation and amortization (D&A) as well as taxes and debt payment costs, EBITDA attempts to represent the cash profit generated by the company's operations.EBITDA is not a metric recognized undergenerally accepted accounting principles (GAAP). Some public companies report EBITDA in their quarterly results along withadjusted EBITDAfigures typically excluding additional costs, such asstock-based compensation.Increased focus on EBITDA by companies and investors has prompted criticism that it overstates profitability. The U.S.Securities and Exchange Commission (SEC)requires listed companies reporting EBITDA figures to show how they were derived from net income, and it bars them from reporting EBITDA on a per-share basis.EBITDA Formulas and Calculation:If a company doesn't report EBITDA, it can be easily calculated from itsfinancial statements.The earnings (net income), tax, and interest figures are found on theincome statement, while thedepreciationandamortizationfigures are normally found in the notes to operating profit or on thecash flow statement.There are two EBITDA formulas, one based on net income and the other on operating income, both of which will arrive at basically the same result. (Net income is operating income minus non-operating expenses, such as taxes and interest.)The respective EBITDA formulas are:EBITDA=NetIncome + Taxes + InterestExpense + D&A(or)EBITDA=OperatingIncome + D&ACriticisms of EBITDA:Because EBITDA is anon-GAAPmeasure, the way it is calculated can vary from one company to the next. It is not uncommon for companies to emphasize EBITDA over net income because the former makes them look better.An important red flag for investors is when a company that hasn't reported EBITDA in the past starts to feature it prominently in results. This can happen when companies have borrowed heavilyor are experiencing rising capital and development costs. In those cases, EBITDA may serve to distract investors from the company's challenges.These are among the other criticisms of EBITDA:1. EBITDA Ignores Asset Costs2. Earnings Figures May Be Suspect3. Company Valuation Can Be ObscuredConclusion:EBITDA can be a useful tool for comparing companies subject to disparate tax treatments and capital costs, or analyzing them in situations where these are likely to change. It also omits non-cash depreciation costs that may not accurately represent future capital spending requirements. At the same time, excluding some costs while including others has opened the door to the EBITDA's abuse by unscrupulous corporate managers. The best defense for investors against such practices is to read the fine print reconciling the reported EBITDA to net income.

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