Finance
by Stig Brodersen and Preston Pysh
Can you read the numbers yourself?
Warren Buffett judges a company largely from its annual reports. Stig Brodersen and Preston Pysh, hosts of The Investor's Podcast, wrote this book for beginners who want to read those reports the same way and use them to decide what a share is worth.
Hear a sample · read by Laura
The balance sheet lists what a company owns, its assets, and what it owes, its liabilities. The difference is shareholders' equity, also called book value. The authors read it for strength, looking for plenty of current assets against short-term debts and not too much borrowing overall.
The income statement starts with revenue and takes away costs, layer by layer, until it reaches net income and earnings per share. Brodersen and Pysh point out that it includes charges that aren't cash, such as depreciation, so a profit here can differ a lot from money in the bank.
The cash flow statement shows the money that actually came in and went out, split into operating, investing and financing. Take the spending on equipment and buildings away from operating cash flow and you get free cash flow, the money a business could hand to its owners.
Return on equity shows how much profit a company makes on its owners' money. The authors read it alongside debt to equity, because heavy borrowing can inflate the return. What Buffett looks for is a high, steady return on equity with not much debt behind it.
Intrinsic value is what the cash a business will produce is worth today. The authors show how to estimate it and set it against the share price. Like Buffett and his teacher Benjamin Graham, they buy only when the price is well below the estimate, leaving a margin of safety.
Full picture
Every company reports three main statements, and you need all of them to see the full picture.
Low debt
Buffett favours firms with little long-term debt, ones that could pay it off from a few years of earnings.
Margins
High, steady profit margins over many years often point to a lasting edge.
Return on equity
Return on equity shows how much profit a company makes from the owners' money.
Intrinsic value
Estimate what the business is worth, then only buy well below that price.
One thing to try
Download the latest annual report of a company whose products you use. Find its net income, shareholders' equity and cash from operations. Divide net income by equity to get return on equity, then check whether the operating cash comes close to the net income.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. The Warren Buffett Accounting Book comes with a Name That Idea round to make it stick.
Get the whole book on KnotdOpen in the appCan you read the numbers yourself? Warren Buffett judges a company largely from its annual reports. Stig Brodersen and Preston Pysh, hosts of The Investor's Podcast, wrote this book for beginners who want to read those reports the same way and use them to decide what a share is worth.
Owns, owes, and what's left; From sales down to earnings; Follow the cash; High returns, little debt; Value first, then price.
Download the latest annual report of a company whose products you use. Find its net income, shareholders' equity and cash from operations. Divide net income by equity to get return on equity, then check whether the operating cash comes close to the net income.
Yes. Knotd has the key ideas from The Warren Buffett Accounting Book in a few minutes, in plain words, plus a Name That Idea round to test them. It's one of 250+ non-fiction books in the app.
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