Reading a company the Buffett way
Warren Buffett looks at the business first and the price last: is it a good business, can you trust its numbers, and what is it worth? Here is that order on this site, with Coca-Cola as the example. Each step opens Coca-Cola's own result, so you can follow along.
1. Start with the business, not the price
Open Coca-Cola (KO) and read At a glance: sales, earnings and the dividend over ten years, the red flags, and the SEC record, one line each. You are looking for a company that has earned money year after year without needing luck.
2. Look for a moat
A moat is what keeps competitors from taking a company's customers: a brand, a network, low costs. It shows in the numbers as high, steady margins, little spending needed to keep going, and earnings that rise most years. The Durable advantage tab checks exactly these. Coca-Cola keeps about 60 cents of every dollar of sales after the cost of the drink itself, year after year: that is its brand at work. The Industries page shows which industries tend to have moats.
3. Check you can trust the numbers
The Red flags tab looks for warning signs such as shrinking sales, heavy debt or earnings not backed by cash. The SEC history tab lists restatements, late filings and auditor changes: rare events that often come before bad news. A clean record isn't proof of quality, but a messy one is a reason to stop.
4. See what the people inside are doing
The Insiders tab shows open-market buys and sales by directors and officers. Executives sell for many reasons, such as taxes, a house or diversifying, but they buy for only one: they think the shares are cheap.
5. Work out what it might be worth
Buffett values a business on its owner earnings: the cash it produces after the spending needed to keep it going, taken here as free cash flow. The Buffett & Graham tab grows the last three years' average for ten years, no faster than the company's sales have grown, and discounts it back at 10% a year. It is a rough estimate: change the growth or discount rate and see how much the value moves.
6. Leave a margin of safety
Because any estimate can be wrong, Buffett and Graham only buy well below it. The buy-below price is 25% under the estimated value. Enter today's price on the same tab to see how far above or below it the stock is, along with its owner-earnings yield.
7. Know what the numbers can't tell you
Ten years of filings show how a business did, not how it will do. A company with falling customers, rising competition or heavy debt can look cheap on every measure and still be a poor investment. Read the company's latest annual report (linked from its result) for what management says about the risks. Use Compare stocks to set two companies side by side, and My portfolio to keep an eye on the ones you like.
This page explains how the site's checks work. It is not investment advice: see the disclaimer.