Financial Zip

I am a huge Warren Buffett fan. He is the only man in the world to build his entire fortune from accumulating stock to the tune of over 30 billion dollars. Yes he owns many companies but it has been solely from acquiring stock in many different companies. He is the best investor of all time and the reason he is, is because of his keen eye for undervalued companies and how he determines if it is or not.

This article covers more advanced fundamental strategies that Warren Buffett uses to value a company. Of course I am not expecting you to pick up the complete intricacies of how Warren does it, most people don’t have that information, but some general guidelines will work.

ROE

I covered return of equity in the last article but it is truly an important indication of how well the company is functioning. Return on equity reveals the rate at which shareholders are earning income on their shares.

Net Income
Shareholder’s Equity

What is important is to compare this figure to other companies that are in the same sector or industry. It has to perform consistently over a 10 year period of time. The comparative figure is more important than actual percentage of course, but the higher the percentage the better.

Is the company avoiding excess debt?
Does the company carry large excess debt? The reason this is very important is that if the company is financing a lot of activities with a high debt amount is it shows that when it does have earnings the profitability or profits go to serve the debt instead of going to the share holders To calculate the debt/equity ratio the equation is:

Total Liabilities
Shareholders’ Equity

To see an example of a debt to equity ratio’s of a company click here. The smaller the debt of the company and the higher the shareholders equity, the better outlook for the company. A good debt/equity ration is .5 to 1.5 To see an example of a where to find the total liabilities and the share holder equity click here.

Look at profit margins

The profit margins of a company tell us if the company has been efficient in using the income it receives and turning it into sales. To calculate the a profit margin

Net income
Net Sales

A good indication of profit margin is to look back 5 years and determine if the profit margin is growing.

Longevity

Warren’s philosophy is very slow as you go investing and value, value, value. Therefore he wants to invest in a company that has been around and stood the test of time. He does not invest in companies that have not been in existence for at least 10 years. He won’t touch them. He doesn’t own any tech stocks because they have only been around for only the last 10 years and he doesn’t understand them. Buffett prefers a company that has a track record that can be dated and proven. It might be wise to follow that advice.

Consumer Monopoly’s

This is a little harder to identify, but it is very important in Buffett’s philosophy. The reason is that companies that produce a superior product and have brand recognition have a huge advantage over the competition. A good example is Coca-Cola when you think of a soda pop that is known the world over what is it? Coke. It is a consumer monopoly. Generally a measure of a consumer monopoly is can you identify a product in every day life that you can’t do with out and does it have a competitive over other companies in the same industry. Not all consumer monopoly’s are good companies that is why the numbers part is very important.

Is the company a bargain?
The reason that Warren Buffett has acquired the money he has is that he identifies companies that are undervalued. This is probably the hardest thing to do for an average investor. If you want to get a good idea of how to do this get the book Buffettology by Mary Buffett and it gives very good information that is beyond the scope of the article.

To determine if the company is undervalued check the intrinsic value, an investor must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues and assets. And a company’s intrinsic value is usually higher (and more complicated) than its liquidation value - what a company would be worth if it were broken up and sold today.

Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization - the current total worth (price). If his measurement of intrinsic value is at least 25% higher than the company’s market capitalization, Buffett sees the company as one that has value.

The important part here is when researching a company is to look at the numbers and see that they are sound and that he company has a historical record of more than 10 years. If you follow the fundamentals you will always be on solid ground with the company you choose.

Next: Charting and Technical Analysis

Stock Market Basics
1. Understanding the Stock Market
2. Equities ( The Basics of Stocks)
3. The Fundamentals
4. Advance Fundamentals
5. Charting and Technical Analysis
6. Virtual Trading
7. Finding a Company You Like
8. Buying and Selling Stock
9. Trading Systems and How to Create One
10. Market Cycles
11. Sectors