Buffett and Balance sheet

I came to learn that Buffett can evaluate/rate companies just from its balance sheet.

Following is the exact quote from the book Snowball :
Buffett had always prided himself on being able to size up a business very fast, from its balance sheet alone

What are the things that he looked in a balance sheet and how did the subsequent analysis followed?

Based on what I learnt from Buffettology, he was looking essentially for

  1. Stable businesses with predictable cash flows
  2. Businesses requiring little fixed capital (property, R&D, Heavy Machinery) investment to keep it running (Like Seers Candies - the most famous example given). Most of hi-tech businesses like Apple, Microsoft need huge investments for next products and hence are difficult to analyse. So he does not invest in them.
  3. Businesses with products used for day-today usage like ketchup (Heinz), Undergarments (Fruit of the loom), Soft drinks (Coke), Gum (Wringleys) etc. Most of these products are almost synomyms for the category they are operating - people don’t drink cold drinks, they always ask for Coke etc
  4. Business with almost monopoly in sections of population like Local Newspaper, Banks (Wells Fargo)

To summarise

  1. No or less debt than industry standards
  2. Stable business
  3. Rising income
  4. Less Capex investment requirements
  5. Monopoly pricing power - no sales decline even with rising prices

For me Balance Sheet indicates 2-3 things very quickly

  1. how much debt levels are there
  2. How asset heavy the business is
  3. a sense on working capital intensity.
  4. any obligations which can impact significantly like other liabilities

In my opinion, Buffet tries to find out what has happened to the money that was invested in the company. So over a period of time, how the book value (reserves) has grown.
Next you can look at how the growth has come in. Have the fixed assets increased or the working capital increased. How these are funded - increase in capital, long term debt, short term debt or no increase in debt or capital. Looking at the past gives an idea of what you can expect the company to do in future.
So just looking at historical balance sheets, a company which has increased reserves, invested in building capacities and become more efficient in use of its working capital could be a good choice to invest.


yeah. actually at one glance look at size of balance sheet ( for non-banking companies). At what pace it is growing.
Size of balance sheet= Total of all assets or Total liabilities.


Thanks to all of you.However one final request to all of you, can you please explain with a real-life demonstration with a real company that actually exists ?

For example you can compare on screener.in the balance sheets of Eicher motors and Hanung toys.

Observe what has happened to the
Share capital: Steady for Eicher, infact even reducing indicates, the co did to need to raise funds from the market., while increases for Hanung means they need to access the market for more funds.
Reserves: Keep on increasing steadily, 6 times in 10 years for Eicher, while for Hanung, there is an increase for few years and then crash, indicating that shareholders funds are wiped out.
Borrowings: Reducing for Eicher, while for Hanung even when the reserves were increasing, the borrowings were increasing at an even greater pace.
Fixed assets and Investments: Increasing for Eicher as the firm adds capacities and increases investments in line with increase in reserves. In case of Hanung the increase in assets is aided by borrowings as they increase much faster than the increase in reserves.
Other assets and liabilities: For Eicher other assets increase at lesser pace than other liabilities indicating that company can get credit from suppliers and get advances or quick payments from buyers. In case of Hanung, the current assets increase at a faster pace compared to current liabilities indicating that it does not have good credit terms with suppliers and also possibly needs to offer credit to customers.

This is very simple inference (may not be accurate) only based on looking at balance sheet. Overall you can see that Eicher has created money for the shareholders (6 times) while Hanung has eroded it over the same period.


Investing with Buffett’s Long-Term Optimism
October 24, 2017
By John Reese —

38697310 - positive outlook and recovery concept as a person or businessman riding a red hot air balloon lifting the dangerous dark stormy skies to reveal a bright warm blue sky as a mindset symbol of managing economic or emotional perception.

Warren Buffett openly argues that anyone who doubts the growth potential of the U.S. economy is horribly misinformed, and his annual letters to Berkshire Hathaway shareholders drive the point home. This year he wrote, “Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.” At last month’s centennial celebration for Forbes, Buffett said, “Whenever I hear people talk pessimistically about this country, I think they’re out of their mind.”

The billionaire CEO of Berkshire Hathaway has put his money where his mouth is over many decades, and continues to do so. This month, Berkshire announced a deal in which it will purchase nearly 40% of Pilot Travel Centers LLC, a family-owned (and the largest) operator of truck stops across the U.S.

According to a Wall Street Journal article reporting the announcement, “The deal runs counter to the long-term growth in electric vehicles and self-driving cars and trucks expected by some analysts.” But Buffett doesn’t see it that way. He is quoted as saying, “There will be more goods moving to more people as the years go by in the United States—that I would bet a lot of money on.” Judging from Berkshire’s other transportation holdings—railroad BNSF, NetJets, and its stakes in airline companies Delta, Southwest and United—Buffett doesn’t make the comment lightly.

This is a consistent message from the billionaire investing legend and, while the thought process behind it is layered, his down-to-earth delivery offers a strong takeaway to investors: It can be helpful to take a step back and look at the bigger picture, particularly when so many factors are at play at any given moment.

In this year’s letter to Berkshire Hathaway shareholders, Buffett wrote:

“American business—and consequently a basket of stocks—is virtually certain to be worth far more in the years ahead. Innovation, productivity gains, entrepreneurial spirit and an abundance of capital will see to that. Ever-present naysayers may prosper by marketing their gloomy forecasts. But heaven help them if they act on the nonsense they peddle.”
It makes sense that, as a long-term investor, Buffett can take more of a big picture approach. Since he concentrates on a company’s fundamentals and the strength of its underlying operations rather than on its day-to-day stock price movements, Buffett can make informed decisions about its long-term viability and potential to grow, then stand by those decisions through market ups and downs. In an article he wrote for Forbes in September, Buffett explains the strategy: “Because we’re not going to sell the business, we don’t need something with earnings that go up the next month or the next quarter; we need something that will earn more money 10 and 20 and 30 years from now.”

The approach is simple without being simplistic, but that doesn’t make it easy to follow. In fact, it may seem a lot easier to formulate an investment plan based on the assumption that you will remain steady if short-term losses occur than to stick to it–particularly as we continue to experience a seemingly steadfast bull market. This is a recurring theme in many of my articles and the cornerstone of our investing strategy here at Validea–follow proven strategies, stay disciplined, and beware of emotions:

Follow proven strategies: My guru investment strategies are inspired by some of the market’s most successful investors (including Warren Buffett, Joel Greenblatt and Benjamin Graham) and are built on key fundamental and financial characteristics that they used to identify companies that look to be attractive investments. Buffett, for example, looks for high return-on-equity, healthy free cash flow, and consistent earnings-per-share. Greenblatt targets companies with strong earnings yield and return-on-capital, while Graham focused on price-earnings and price-book ratios as well as a company’s liquidity and leverage.

Stay disciplined: No strategy will beat the market every month or even every year. If that’s your goal, you might end up just jumping from strategy to strategy chasing returns or the hottest stocks–a recipe for buying high and selling low. If you think long-term (over a time horizon of at least five years), you’ll be better equipped to endure short-term underperformance and reap the rewards of a good strategy.

Beware of emotion: It’s easy to get swept up in an exciting story surrounding a stock (and buy it) or get consumed by a negative story (and sell it). But doing so without first taking a look at the numbers can lead to ill-fated actions. Good investors don’t let hype or hunches influence their decisions.

This year’s letter to Berkshire shareholders includes another pearl, delivered in Buffett’s inimitable style: “Early Americans, we should emphasize, were neither smarter nor more hard working than those people who toiled century after century before them. But those venturesome pioneers crafted a system that unleashed human potential, and their successors built upon it.” While the comment underscores his unbridled enthusiasm regarding our country’s economic potential, it also serves as a metaphor for investing: getting back to fundamentals can be both inspiring and profitable.