How Does Buffett Quickly Analyze a Stock?

Warren Buffett typically screens companies by examining their financial statements during stock selection. In his book Tap Dancing to Work, when a journalist inquired, "Where do your ideas come from?" Buffett responded: "Just by reading. My job is essentially to read every day."

Through reviewing annual reports and evaluating core financial metrics, Buffett performs initial company assessments.

1. Return on Equity (ROE)

This indicator measures a company's capital utilization efficiency. The standard formula is ROE = Net Profit / Average Shareholder’s Equity. DuPont Analysis further decomposes ROE into: ROE = Net Profit Margin × Asset Turnover × Financial Leverage. As a consolidated metric, ROE offers a holistic performance snapshot. Buffett requires ROE to surpass 15%. (Analysis below references Kweichow Moutai’s 2023-2024 reports.)

Example: Moutai’s 2023 and 2024 ROE stood at 34.19% and 36.02% respectively, marking a 2-point increase. Given Moutai's substantial idle cash reserves, its 2024 cash-adjusted ROE approached 50%, implying potential investment recovery within two years.

2. Gross Profit Margin

Calculated as (Operating Revenue – Operating Costs) / Operating Revenue, this metric reveals product profitability. For instance, a ¥100 product with ¥40 production costs yields a 60% gross margin. Buffett targets margins exceeding 40%, as high values indicate strong product differentiation, economic moat breadth, and risk resilience.

China's liquor sector exhibits notably high margins. Moutai maintained 92.11% (2023) and 92.01% (2024) gross margins, showing a minor 0.1-point annual dip.

3. Net Profit Margin

Defined as Net Profit / Operating Revenue, this reflects actual profitability after all expenses. High gross margins may erode if management or marketing costs escalate. Buffett favors companies sustaining over 5% net margins.

Moutai achieved 49.5% (2023) and 51.2% (2024) net margins, rising 1.7 points annually, suggesting optimized operational expenses.

These represent three of Buffett's fundamental criteria, though comprehensive analysis also considers P/E ratios and competitive differentiation.

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How Ordinary People Can Analyze Stocks Like Warren Buffett