- LOOK FOR EARNINGS PREDICTABILITYBuffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings. This model looks at 10 years of earnings.
- LOOK AT THE ABILITY TO PAY OFF DEBTBuffett likes companies that are conservatively financed.
- LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON EQUITY:Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage.
- LOOK FOR CONSISTENTLY HIGHER THAN AVERAGE RETURN ON TOTAL CAPITALBecause some companies can be financed with debt that is many times their equity, they can show a consistently high ROE, yet still be in unattractive price competitive businesses. To screen this out, for non-financial companies Buffett also requires that the average Return On Total Capital (ROTC) be at least 12% and consistent.
- LOOK AT CAPITAL EXPENDITURESBuffett likes companies that do not have major capital expenditures. That is, he looks for companies that do not need to spend a ton of money on major upgrades of plant and equipment or on research and development to stay competitive.
- LOOK AT MANAGEMENT’S USE OF RETAINED EARNINGSBuffett likes to see if management has spent retained earnings in a way that benefits shareholders.
- HAS THE COMPANY BEEN BUYING BACK SHARESBuffett likes to see falling shares outstanding, which indicates that the company has been repurchasing shares.
STAGE 2: Should I buy at this price?
- CALCULATE THE FUTURE STOCK PRICE & EXPECTED STOCK RETURN BASED ON THE AVERAGE ROE METHOD
- CALCULATE THE FUTURE STOCK PRICE & EXPECTED STOCK RETURN BASED ON THE AVERAGE EPS METHOD
- LOOK AT THE RANGE OF EXPECTED RATE OF RETURNModel looks for stocks with a minimum of 12% return, but prefers stocks with 15% or more annual return potential based on the range of the two methods (ROE and EPS) method above.
Inga kommentarer:
Skicka en kommentar