This is a terrific video. I didn't go to business school, read Warren Buffett extensively. These rules were always mentioned but never really explained. What might make a good video would be to look at Apple after the introduction of the iPhone in 2007. I invested in 2008, rode out the crash no problem, did great over many years. The first few years of my investment in Apple ALL the business news I found just repeated over and over again, "Apple has almost the entire 35% of the high end cell phone business in the U.S. Who else can they sell iPhones to? As though they'd saturated the entire potential market. I still had a Finnish Nokia. This just seemed odd. I wondered, am I missing something? One of my main reasons for investing in Apple was I expected them to expand iPhone sales around the world. (I had no clue about how to analyze their balance sheet.) So then Buffett and Berkshire in 2012 invested in IBM. Did that follow these rules of thumb? (My reaction was to wonder, did I miss something? Then I thought, no, maybe that's business computers which was separate from smartphones.) In 2016 Buffett said IBM had been a mistake, sold their position off at a loss, and then invested in Apple. (Did the Rules apply to either of these?) And in about 2019 Buffett said he wished Berkshire could buy all of Apple. And the recent Berkshire sell off of a significant portion of their position in Apple. Did that follow the Rules? In no way am I trying to say these Rules aren't powerful, just that until now I didn't have a clue how to apply them.
Stock buy backs just seems like a lazy strategy to increase value, after completion it leaves the market available stock reduced, increasing positive and negative market swings, see Arm as an extreme example (re limited stock available to market), and shows the amount of cash no longer available to deliver strategic investment in future products and services, the cash was invested in stock, not invested in future growth initiatives, be it R&D or other investments, like staff, yes they create value, not just an expense line to reduce.
1.Cash to debt: more cash than debt 2.Debt to equity ratio : below 0.8 Preferred stock is zero 4. Retained earnings growing consistently ( even during recessions) 5. Has treasury stock ( cumulative sharebuy backs)
About Rule #5: but there are companies with buybacks and no treasury stock. What does it mean? Shouldn't we look instead for the amount of repurchases in the cash flow statement?
I really love this kind of no BS straight to the point content. I am always confused what the different US balance sheet terms mean and this brought me a step closer to understanding. Thank you!
I'm new to your channel, and I just subscribed because you got right to the point and kept your video under 10 minutes which is exactly the way to do it! Thank you!
In his early years, Warren Buffett concentrated heavily on balance sheet fundamentals, often seeking undervalued companies with strong assets relative to their market price. Over time, his approach evolved to more focus on the quality of businesses and their long-term earnings power, recognizing that sustainable competitive advantages and robust cash flows are key drivers of superior investment returns. This shift reflects Buffett as an investor was primarily due to Charlie Munger influence and also larger amount of money under management.
This. He started strongly based on ideas of his tutor Ben Graham. But shifted into emphasizing the business value of a company. Never only rely on fundamentals because they only reflect the past. It is only one column in evaluating a business. Buffet is addressing business value with his "moat" theory and also with his "stay in your field of competence".
@@piercarlotalenti4044 it starts with the annual report. Buffett says if it doesn’t answer all questions, they are hiding something. Then he would interview management
Very informative. I took a course on this in uni but only understood it in theory. Now after having worked for others and started my own business, I can appreciate it for what it is.
I bought CMG recently on its latest pullback because I always thought it was overvalued. I was tired of missing owning a great company so I pulled the trigger and I’m up 12%-15%, however, I bought PLTR shortly after the DPO in 2022 and added multiple times since then and I’m up 97% since April and 295% since November 2022.
Don't know if you have done a video on this before, but how about one on minimum cash to invest to use an investment advisor, how to identify a good one and reasonable fees to expect to pay. Great presentations, by the way!
Nice video. It would be great to see a similar analysis for other business forms such as cooperatives, nonprofits, etc. so that their members can analyze how well their cooperative is being run. Obviously, not quite the same as an investor perspective, but I suspect most of the same rules apply just different terms on the balance sheet.
@@BrianFeroldiYT I admit to having an ulterior motive with this request. I am a board member of an electric cooperative who was elected just before retiring from a long career in a technology company. I worked in R&D, engineering and product development - not finance, but I learned enough along the way to be fairly proficient in things finance and accounting related. I am appalled at how most cooperatives are measured and managed. They seem to be controlled mainly by their lenders. I simply can’t imagine a traditional company or corporation who would use as one of its primary metric a ratio like MDSC. When you primary financial metric is your ability to pay back your loans, it really says who is running the cooperative, yet this is considered completely normal in the cooperative world, well in the electric cooperative world anyway. I can’t speak to cooperatives in other industries. It would be interesting to see another opinion on this as it seems that most traditional corporate finance people have no reason to even look at cooperatives and I’ve seen only one article that discusses nonprofit debt and that was from Harvard many years ago and it seems nobody ever paid attention to it. It showed clearly that carrying large debt wasn’t a financial advantage, as most cooperative manager’s claim, yet nobody pays attention. I wish someone like Warren Buffet would take a close look at cooperative financials and offer an assessment. I may be full of crap, not being a finance professional, but it just seems to me that having interest expense consume the lion’s share of your margins simply isn’t wise.
ok I am taking up the lulu challenge. Give me a minute..PE ratio is low, on the very low end of its annual price range, earnings growing each year, net profit margin is 16% (firat thing i dont like, it means there is no monopoly), ROC and ROA are very high. I would say this a strong buy, amd you can set a target of usd500 per share.
It is a little confusing that in your analysis of Chipotle , in Item. #1, you use a value of 0 for debt, but for Item #2, the is a large number for debt.
Balances usually include 2 years data: so this would be helpful with retained earnings growth visualization - no we can't figure out if 7000 reflects growth.
I'm confused about the part where you said Chipotle had no debt, It states they did have an accounts payable of 197.6 in Dec 23. Accounts Payable is a type of short term debt that is owed to suppliers etc.
Yes but it's short term plus 203 million is a drop in the bucket of 5.2 billion so even taking that into account the cash & equivalents would still be greater than this short term debt
Current debt & liabilities (due in a year or less) pertain to the daily operations of the business (like a payroll loan for example). Long-term debt is considered a financing activity in a business. Although in this video long-term leases shown at 5:05 is debt and attributes to the 1.2 D/E ratio edit* op does say he doesn't consider long-term leases debt in this scenario, but in larger corporate finance we normally do.
You are missing one of the most important fact which is „how long did it take to get the balance done and the get the auditors opinion.‘ if it takes longer than usual there are issues that most likely are not shared with the public
Very good series. This is along with income statement analysis and cash flow statement analysis help to figure out the value stocks with strong Moat. Thanks.
What is the relative importance of this quick fundamental analysis, if by Warrens own advice for most investors, that aren’t playing on his level of monopoly, is to put their investment dollars into a passive S+P 500 fund and reinvest distributions back into it to compound. Wouldn’t the relative strengths and weaknesses of the 500 balance one another negating the need to do such granular work?
Hi, Thanks for making the video. What's the source of these 5 rules of thumb? How have you been able to attribute these to Buffett? Which book? Which letter? Which interview? Thanks,
00:00 Introduction and Purpose 00:32 Understanding the Balance Sheet 00:54 Rule of Thumb #1: Cash vs. Debt 01:33 Rule of Thumb #2: Debt to Equity Ratio 02:16 Rule of Thumb #3: Preferred Stock 03:00 Rule of Thumb #4: Retained Earnings Growth 03:50 Rule of Thumb #5: Treasury Stock 04:35 Analyzing Chipotle's Balance Sheet 07:01 Final Evaluation of Chipotle by GPT Breeze
I've been an investor in Apple,Tesla because I strongly believe in the company. I've always believed in the stock, but now I don't know if i am to re-distribute my portfolio and put some money in Nvidia. especially now that we are experiencing a market correction.
GameStop has almost $5B in the bank and no long term debt except the leases on its stores. I can’t wait to look at the other metrics. It even turned a profit last year…not a big one…but still had one! 😊
@@BrianFeroldiYT I'm just persnickety. However precision plays a big role when it comes to whom I trust on the internet, You clearly know your stuff, though. Keep doing what you're doing.
it helped alot thank you so much for sharing this information i hope you earn millions of subscribers just because you are doing a great job by providing such informative knowledge
I got lost on #5... How is -5M > 0? So +5M would be bad? I'm not certain how I could apply that concept with the (apparent) math being, uh, wonky? Could you explain further or point to a video which may help cure my ignorance? Thanx much.
very extremely important rule of investing: if a statement is part of a filing submitted to the SEC, it's quite possibly a lie. if it isn't? it is CERTAINLY a lie.
Thanks for the video, Brian. Can you more deeply explain why stock buyback is a negative number in the equity section? I would have thought it would be considered a positive asset, just as if the company had bought stock in a third party/external company. Where can the positive asset value of these buyback shares be found in the balance sheet?
@L1ndros88 "Can you more deeply explain why stock buyback is a negative number in the equity section?" Answer: The Equity section of a balance sheet reflects ownership. Stocks are units of external ownership. If a company buys back its shares it reduces external ownership, which shows as a negative number in the Equity section. "I would have thought it would be considered a positive asset, just as if the company had bought stock in a third party/external company." Comment: Buying back one's own shares is different from buying shares in a "third party" or external company. Buying back shares does not increase assets. Instead, liabilities are reduced (namely reduced shares outstanding). The corresponding asset entry will be a reduction in cash reserves. "Where can the positive asset value of these buyback shares be found in the balance sheet?" Answer: A share buyback has no positive impact on assets. As mentioned above, there is a negative asset impact on cash (paid out for the buyback) and a corresponding negative impact on no. of shares outstanding and, in the case study of Chipotle, a reduction in treasury stock value showing the exact value paid out.
This was very interesting stuff, for someone like me who’s new to investing. One question: In the Chipotle example you said they had no debt - however you later jumped to a point in their balance sheet where it showed a debt value and some debt ratios. Am I missing a subtlety in balance sheet interpretation, here?
Yea… this is an example of how accounting can be confusing. There’s a term called operating police liability, which many financial aggregators consider to be “debt”, hence why it’s listed as a liability. Since these are future at least payments, I do not consider them to be debt, just like I wouldn’t consider future salary payments to employees to be debt. Hope that helps.
You said on rule one that Chipotle has no debt, but then turn around and use the liabilities and debt/equity ratio line item for rule two. Could you explain that?
Yeah I thought about that too .. unless he specifically defines what type of debt we are talking about ! Btw, in a diff comment he replied to another user mentioning that debt is "borrowings" .. so I guess he jyst means loans etc..
Chipotle’s “debt” is operating least liabilities. While that is a liability. I don’t consider it to be debt. Hence, why I excluded it from one, but included it in the other.
@@gojo252seems to me like they would just however you look at it it shows that a company is confidently looking to maintain its property’s therefore expanding so that would mean growth, i assume that’s why he doesn’t count that as an actual “liability”
Thx Brian - just got into investment and this will make my decision more intelligent and confirm some of my predictions. You just earned a new subscriber!
Life is short, you should enjoy it while you are here. The other life does not depend on you, nor do you know if you will be able to enjoy it. In fact, no one can say for sure.
Jonas Herman, a licensed fiduciary is the brain behind my success. I've gotten into a plethora of assets with $16k spread across stocks (options and futures) for the short term and Roth IRA, index funds, and ETFs, for the long term. Now with over 81k in roi, I sit back and just reinvest at intervals while I handle my other businesses.
To me, investing is not worth it and I know that's the same mindset holding me back from taking a step forward in my finances. It’s all gambling. Maybe it’s because I'm new to it, I can't tell.
About no5, when a company buys back stocks, treasury stocks, shouldn't it show with a negative figure on the balance sheet? Suppose a company repurchases 10,000 shares of its stock at $20 per share. The treasury stock entry on the balance sheet would be: Treasury Stoc k= (10,000 shares×$20)=−$200,000 (minus) - This amount shouldn't be subtracted from the total shareholders' equity?
Wait how can the company (chipotle) have a debt free balance sheet but Debt/Equity is 1.2? If debt is 0 debt / anything should always be 0, right? I am guessing these are two different kinds of debt but how?
Thanks for the great information.. Just an FYI moving forward... I believe a "/" is considered a forward slash (the way the top leans) and a "\" is a back slash. I found most people confuse the two, and more than most don't even care for the differentiation, but just an FYI in case you do presentations, etc.
What is the difference in debts and liabilities in this case? Usually they are both the same and i've never seen a balance sheet that lists them differently.
Purchasing a stock may seem straightforward, but selecting the correct stock without a proven strategy can be exceedingly challenging. I've been working on expanding my $210K portfolio for a while, and my primary obstacle is the lack of clear entry and exit strategies. Any advice on this matter would be greatly appreciated.
Leases are debt aren't they? Of course they might be property leases but could also be leases for equipment/vehicles/furniture etc, so money borrowed to buy assets against which they will pay interest?
I still don't fully understand the thing about Treasury Stock. In the first example of some fictive company, the amount showed positive value and Buffet's rule says the value should be greater than 0. In the example of Chipotle, the Treasury Stock showed negative amount. Given that this actually represents the amount of stock buyback that company does, normally it would be treated as a expense and having negative amount be a good thing makes sense. So I'm wondering now, why did that first example show positive amount? Can it happen that amount is positive and what does it mean? Also, when talking about Buffet's rule regarding this, are we talking about the absolute value?
Absolute value. Buffett wants to see that a company is buying back stock. However, since treasury stock is a Contra equity, it is listed as a negative number so you have to take the absolute value
@@patmclaughlin107 Liabilities also includes trade accounts payable amounts, for example. Think of amounts due now for materials already delivered (meats, produce, etc.). Total liabilities is always bigger than debt. This guy misspoke. Also, their lease liabilities are significant, which he downplays. I would also suggest always looking at the company’s Cash Flow Statement. Balance Sheet alone is insufficient. Retired CPA.
You missed the total debt in the ratios tab? Thus the cash to debt analysis is incorrect and debt to equity ratio is 1.2 - these two ratios with debt must align.
Fair question. Since we are only looking at cash, accounts payable is usually offset by accounts receivable. However, these are just rules of thumb and there’s always more nuance needed.
