The remarks of Warren Buffett and analysis by Buffett authors suggest that, see at the very least, capsule Warren Buffett looks at the following aspects of a corporation and its operations. They can be put in the form of questions that any sensible investor should ask before considering a stock investment.
How can we get the financial information that Buffett gets?
We probably cannot get it in the detail that Buffett can get it through the accounting resources of Berkshire and his own access to the companies in which he seeks to invest, so what do we do?
A listed corporation must file annual financial statements with its home stock exchange and government regulators and these are generally a matter of public record, allowing us, given time and knowledge, to look at each annual filing and obtain the data.
However financial information providers such as ADVFN collate this information and give it in both detail and table form, making it much easier for smaller investors like us to consider. ADVFN provides a considerable amount of information for free upon registration, and we use their free service for all our financial research at this website. (Read Why we recommend ADVFN).
Basic questions to ask
1. Does the company sell brand name products that are likely to endure?
2. Is the business of the company easily understood?
3. Does the company invest in and operate businesses within its area of expertise?
4. Does the company have the ability to maintain or increase profitability by raising prices?
5. Is the company, looking at both long-term debt, and the current position, conservatively financed?
6. Does the company show consistently high returns on equity and capital?
7. Have the earnings per share and sales per share of the company shown consistent growth above market averages over a period of at least five years?
8. Has the company been buying back its shares, and if so, has it bought them responsibly?
9. Has management wisely used retained earnings to increase the rate of return to shareholders?
10. Is the company likely to require large capital sums to ensure continuing profitability?
This would only be the first stage of the process. The next, and most important question, is determining the price that an investor such as Warren Buffett would pay for the stock, allowing for the margin of safety.
To see how these principles can be applied to a potential investment, refer to our case study on Coca Cola.