Assets and liabilities as clues

... cont'd from yesterday...

Continued discussion about Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage

Step Two: Examine the Statement of Assets & Liabilities.

1. Cash. Look in the Notes to the Financial Statements or elsewhere to determine where the Cash came from. If it came from Sales, that’s good. If it came from borrowing money, issuing more shares, or selling off parts of the business (other than sale of the company’s products or services), that’s bad.

2. Inventory. Look at the Inventory figure for the last 10 years. An ECDCA’s Inventory figure would be consistently rising at the same time that the EPS has been consistently rising over the last 10 years. Erratic ups and downs in Inventory figures over a 10 year period means the subject company is not an ECDCA.

3. Net Receivables. An ECDCA, when compared to competitors in the same industry, has a consistently lower ratio of Net Receivables/Revenue.

4. Property/Plan/Equipment. An ECDCA’s figure, after adding back Accumulated Depreciation, would be consistently the same year after year.

5. Long-Term Investments. Look in the Notes to the Financial Statements for what is included in this figure. If it is comprised of investments in other ECDCA’s, then that’s good. If not, that’s bad.

6. Short Term Debt. Ratio of STD to Long Term Debt should be less than 1, unless the LTD is zero in which case your calculator will self-destruct in 10 seconds.

7. Long Term Debt. This should be zero or almost zero.

8. Total Liabilities to Shareholders Equity Ratio. Except for companies in the financial business, the debt to shareholder equity ratio should be less than 0.80 to qualify as an ECDCA.

9. Retained Earnings. This should be growing year-after-year to qualify as an ECDCA at a rate of over 6% per year.

10. Treasury Stock. Anything above zero is good.

11. Return on Shareholders Equity. This should be more than 20% per annum year-after-year.

...cont'd tomorrow...

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