Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Durable Competitive Advantage > WB Interpretation FS > Flashcards

WB Interpretation FS Flashcards

0
Q

3 types of businesses Warren looks for?

A

1 sell unique product
2 sell unique service
3 low cost buyer and seller of product/service

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
1
Q

How do you notice the durability of a company’s competitive advantage 5 things?

A 
1 consistent high gross margins
2 consistently carry little or no debt
3 consistently not spend high sums on R&D
4 consistent earnings
5 consistent growth in earnings
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

We should always. Investigate what the company is including in its…(against revenues)

What idea does this give us?

A

Cost of goods sold/cost of sales calculation

How management is thinking about business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Gross profit margin equation?

A

Gross profit margin = gross profit/total revenues

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Gross profit margin significance?

A

Companies that have excellent Longterm economics
Have consistently higher gross margins than those
That don’t

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Range of good gross profit margins for warren’s key companies?
Bad gross profit margins?
What % equals a fiercely competitive industry?

A

Good: over 40%, excellent 51%-73%

Bad: under 40%

Fiercely competitive industry: under 20%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

How many years should be used to track the consistency of profit margins having a durable competitive advantage?

A

10 years

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are 4 ways a company with a high gross margin can be stripped of its durable competitive advantage?

A

1 high research costs
2 high selling and administrative costs
3 high interest costs on debt
4 high capital expenditures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is important to see with selling, general and administrative expenses in a company with a durable competitive advantage?
Examples?

A

Consistent percentage of SGA Expenses to gross profit
Year after year

Coca cola SGA expenses are 59% of its gross profit
Moody’s 25%, Proctor & Gamble 61%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What percentage is considered fantastic for selling, general and administrative expenses for a company?

A

Below 30%,

but can still be durably competitive between 30% and 80%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

R&D costs and durable competitive advantage?

A

Companies that have to spend large amounts on R&D

Have flawed Longterm economics

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What does Warren think of EBITDA? What should be included in calculating earnings?

A

It’s not a good calculation because it ignores the very
Real cost of depreciation

Depreciation should be included in calculating earnings

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How depreciation relates to durable competitive advantage?

A

Durably competitive Companies have lower depreciation
Costs as % of gross profit

Compared to companies that suffer from high competition

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Examples of good ratios of depreciation expenses to gross profit?

A

Good: consistently 6 to 8%

Bad: GM runs 22% to 57% depreciation expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Companies with a durable competitive advantage carry…

A

Little or no interest expense

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Acceptable examples of interest expense to operating income ratios?

A

Proctor & Gamble 8% of operating income to interest expenses

Wriggled pays 7% operating income to interest expenses

Southwest pays 9% operating income to interest expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Acceptable ratio interest expense to operating income ratios?

Acceptable examples of interest expense to operating income ratio for the banking industry?

A

15% general

30% interest expense to operating income banking industry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Nonrecurring events when calculating earnings?

A

Non recurring events should not be included in the

earnings calculation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Significance of income before taxes?

A

Number warren uses when calculating the return he

Is getting when he buys the whole business or stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Income taxes telling the truth? What to know?

A

Check the taxes filed with the SEC see if telling truth
See if matches income statement

As of 2014, the corporate tax rate for over $18,333,333
Is 35%

Look at corporate tax table

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Durable competitive advantage and net earnings?

Examples?

A

Over the long term companies will report a higher
percentage of net earnings to total revenues than
Their competitors

Coca cola earns 21% on total revenues
Moody’s earns 31% on total revenues

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Durable competitive advantage: net earnings percentage, what is considered excellent? What’s considered gray area?

What industry should not be evaluated based on this ratio?

A

Company showing net earnings history of more than 20%
On total revenues

Gray area 10% to 20%

Banks and financial companies should not be evaluated
based on this ratio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Durable competitive advantage: what period should be used to analyze earnings per share? What should you look for?

A

10 year period

Consistently upward trend

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What does an upward trend in earnings show?

Types of expenditures?

A

Company’s economics are strong enough to allow it
To make expenditures to increase market share

Through advertising or expansion or financial engineering
Like stock buy backs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
When a company has a high amount of cash it tells warren one of two things?
1 company has competitive advantage generating a ton Of cash which is good 2 company just sold a business or a ton of bonds Which may or may not be good
25
How to test where the company's cash is coming from? What is a good indicator the company has a durable competitive advantage?
Look through 7 years worth of balance sheets Good: little or no debt, no sale of shares or assets While seeing a history of consistent earnings
26
What advantage does manufacturing company have?
Products they sell never change and never become | Obsolete
27
When trying to identify a manufacturing company with a durable competitive advantage look for... What does this show?
Inventory and net earnings that are on a corresponding rise Means company is finding profitable way to increase sales Which calls for an increase in inventory
28
Inventories, what's considered bad with manufacturing companies?
When inventories ramp up for a few years and just as Quickly ramp down Shows companies caught in highly competitive industries prone to booms and busts
29
What's bad to see when testing where a company's cash is coming from?
Issuing debt and stock
30
Competitive advantage: net recievables?
If company consistently shows a lower percentage of Net receivables to gross sales than its competitors It has competitive advantage working in its favor
31
Durable competitive advantage: current ratio?
Durably competitive companies can have a current ratio | Below 1 as long as they have consistent earning power
32
Durable competitive advantage: property, plant, equipment
Company doesn't have to constantly upgrade its equipment To stay competitive, only updates when it wears out Can finance new plants and equipment internally (not use stock or debt financing)
33
Businesses that benefit from a durable competitive advantage almost never...
Sell for below their book value
34
Looking at a companies Longterm investments can show?
Insight in How Management invests. Do they invest in companies With a durable competitive advantage? Or mediocre companies?
35
Return on assets ratio
Return on assets = net earnings/total assets
36
In 2008 Moody's has $1.7 billion in assets and shows a return on assets of 43%, while Coca Cola has $43 billion in assets and shows a return on assets of 12%, what does this mean?
Moody's has underlying economics far superior to Coca Cola, the durability of Moody's competitive advantage is Far weaker than coca cola because a competitor Could rake in $1.7 billion to take on Moody's Raising $43 billion to take on Coke is an impossible Task
37
The smartest and safest way to make money in the banking industry? It's dangerous to? Examples?
is to borrow Longterm and lend long term Dangerous to borrow short term and lend Longterm Because interest rates might jump Wells Fargo $.57 short term debt for ever $1 of long term Debt BAC has $2.09 short term Debt for every $1 of long term Debt
38
When a company has long term debt it is important to... When can it spook investors?
Check when it will come due It can be confusing and spook investors when it gets Lumped with short term debt on a balance sheet
39
The current ratio is of great importance in determining...
The liquidity of a marginal to average business, but Of little use of telling us about a company with a Durable competitive advantage
40
Durable competitive advantage: long term debt? | Why?
Companies have a durable competitive advantage when they carry little or no long term debt because these companies are so profitable they are Self financing when they are expanding the business/making acquisitions
41
Period to look for long term debt and why?
If there has been 10 years of operations with little or no Longterm debt on the balance sheet the company Has some kind of durable competitive advantage
42
With long term debt, Warren's historic purchases indicate | On any given year the company should...
Have sufficient yearly earnings to pay off all long term | Debt within 3 or 4 year earning periods
43
Leveraged buyouts of excellent companies result in... | Why?
Creating a lot of debt or the company, so bonds are usually The better investment because the company will focus on paying off the debt over Growth
44
Minority interest entry?
When a company acquires more than 80% of another Company it can shift that company's entire balance Sheet onto its own balance sheet Minority interest represents the remaining percentage The company doesn't own
45
Identifying a durable competitive advantage: Adjusted Debt to Shareholder's Equity Ratio? What's a good value for a durable competitive advantage? Examples of good ratios
Debt to Shareholder's Equity Ratio = (Total Liabilities) /(Shareholder's Equity + treasury stock from share Buybacks) Below .80 is good Ex Moody's = .63, Cokes =.51, Proctor & Gamble = .71 Bad: Goodyear = 4.35, Ford = 38
46
Adjusted Debt to Shareholder's Equity Ratio: Banks?
Have much higher debt to Shareholder's Equity Ratios Usually over 10 Warren Buffett really likes M & T Bank which has A ratio of 7.7
47
Durable competitive advantage: Preferred stock, | How does it relate to pretax income?
Companies that have a durable competitive advantage Tend to not have any preferred stock Dividends paid on preferred stock are not deductible From pretax income making preferred shares expensive Money
48
Durable competitive advantage retained earnings?
Good measure: the 5 year rate of growth of retained Earnings indicates if company has competitive advantage Ex: coke 7.9% RE growth, Wrigley 10.9%, Burlington Northern 15.6%, Berkshire Hathaway 23%
49
Retained earnings, what changes them without internal growth?
Acquisitions
50
Durable competitive advantage: treasury shares
The presence of treasury shares on the balance sheet and A history of share buy backs Signals the company has a durable competitive advantage
51
Determining the company's return on shareholders equity without the effects of financial engineering, equation?
Return on Shareholder's equity adjusted for financial engineering = (net earnings)/(shareholder's equity + treasury stock)
52
Return on Shareholder's equity equation? Significance? Examples?
Return on Shareholder's equity = Net earnings/Shareholder's equity Companies that benefit from a durable competitive advantage Show higher than avg. returns on shareholder's equity Ex. Coke 30%, Wrigley 24%, Hershey 33%, Pepsi 24%
53
Some companies are so profitable that they do not need to... What should you not confuse these companies with?
Retain earnings, so they pay them all to Shareholder's, these Companies will have a strong earnings history Don't confuse these companies with mediocre companies that have no retained earnings (negative earnings history)
54
Durable competitive advantage: leverage?
Warren has learned to avoid businesses that use lots of | Leverage to help generate earnings
55
Durable competitive advantage: capital expenditures listed on the cashflow statement? Examples of excellent companies?
Historically if a company is using less than 50% of its Earnings on capital expenditures that is good Excellent if using less than 25% Ex. Coke 19%, Moody's 5%, American Express 23%
56
Durable competitive advantage: cash flow statement- cash from investment activities "issuance (retirement) of stock, net". AKA Share buy backs (retirements)?
Tax free way of increasing shareholder value Good if company has a history of buying back shares
57
How warren sees shares as an equity bond? What is the "bond" and what is the "coupon/interest"?
"bond" = company's shares/equity | "coupon/interest payment" = company's pretax earnings not the dividends the company pays out but the pretax earnings
58
Equity bond coke: stock price $6.50, pretax earnings $.70/sh. , after tax earnings $.46/sh, annual rate of earnings growth 15%. What is the pretax interest rate paid for the equity bond and what will eventually happen?
The pretax interest rate = .7/6.5 = 10.77% | It will eventually become 15%
59
In 2008, Cokes pretax earnings = $3.96 and long term corporate interest rates are approximately 6.5%. Whats the valuation of coke?
3.96/.065 = $60.92 | That year the market valued coke between $45 and $64
60
What is a big reason the stock market eventually tracks the increase in these companies' underlying values?
Their earnings are consistent
61
When interest rates drop, a company's earnings are... When interest rate rise?
Worth more, because they will support more debt Making the company's shares worth more Rise: earnings are worth less, because they will support Less debt, making the company's stock worth less
62
Over the long term what determines the economic reality of what long term investments are worth?
Long-term interest rates
63
When is the right time to buy? The wrong time?
Right: bear markets, when the business confronts a one time solvable problem Wrong: the height of bull markets
64
When is the right time to sell a business with a durable competitive advantage?
Try not to, avoid taxes, only if you see a better investment Alternative, or when the company loses its durable Competitive advantage Or if the p/e exceeds 40
65
What long term corporate bond yield should be used to valuate stocks?
Moody's seasoned baa corporate bond yield

Durable Competitive Advantage (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions