Buffett on Financial Statements: Balance Sheet Liabilities · 2019-04-17 · The Top 6 Dividend...
Transcript of Buffett on Financial Statements: Balance Sheet Liabilities · 2019-04-17 · The Top 6 Dividend...
1 The Top 6 Dividend Stocks These 6 Long-Term Stocks Could Help You Generate Regular Income Wealthy Retirement
2 3 Safe Income Stocks - Pay Upto 12% Dividend in 2019 Free Report Reveals the Safest & Fastest Growing Stocks to Ownincomeinvestors.com
3 #1 Stock to Buy Right Now Here's a recommendation that several top analysts agree on TradesoftheDay.com
1. How to use GuruFocus - Tutorials
2. What Is in the GuruFocus Premium Membership?
3. A DIY Guide on How to Invest Using Guru Strategies
April 16, 2019 | About: WFC +0% BAC +0% GM +0% F +0% MCO +0% BRK.A +0% BRK.B +0% KO +0%
Buffett on Financial Statements: Balance Sheet LiabilitiesA closer look at the relationship between debt and durable competitive advantage
Robert Abbott
Articles (479) | Author's Website | 176 followers Follow
Bookmark Print File Share
After dealing with the income statement and balance sheet assets in their book, “Warren Buffett andthe Interpretation of Financial Statements: The Search for the Company with a Durable CompetitiveAdvantage,” authors Mary Buffett and David Clark turned to the liabilities side of the balance sheet.
That current liabilities section of the statement looks like this:
“Current” refers to debts and other obligations that must be met within the fiscal year.
→
Join the forumto win a value investing book
(/flarum)How do I choose a stock if I researched it as a good choice(/flarum/d/155767) ! 13
Investing in a small business (/flarum/d/146923) ! 5
Valeant (/flarum/d/168934) ! 37
We shouldn't be finding much to buy right now, correct?(/flarum/d/177428) ! 42
Customizing GF screeners (/flarum/d/208338) ! 8
BENEISH M-SCORE (/flarum/d/209767) ! 3
Is FedEx a good buy right now? (/flarum/d/191588) ! 3
The Retail Sector (/flarum/d/118643) ! 20
Reinvest MRD (/flarum/d/209618) ! 1
DB stock (/flarum/d/209595) ! 1
Using the Futures Markets (/flarum/d/201568) ! 2
Access the Forum! (/flarum)
Performances of the stocks mentioned byRobert Abbott
Search ▾ Enter Ticker, Guru, Company, etc.Go
Home Screeners FilingWiz Gurus Insiders Market Articles Conference Forum Subscribe
Get 7-Day Free TrialGet 7-Day Free TrialMy Portfolios ▾ My Gurus ▾
GF
Cha
t
⋆
Warning! GuruFocus has detected 3 WarningSigns with WFC. Click here to check it out.
WFC 30-Year Financial Data
The intrinsic value of WFC
Peter Lynch Chart of WFC
Again, the authors were looking at them as a tool for discovering durable competitive advantages.Such moat-like qualities are found in some line items:
Accounts payable and accrued expenses
This category covers what a company owes its suppliers for raw materials, inventory and the like. Inother words, the goods have been delivered, but the bill, or a portion of it, has yet to be paid.Accrued expenses refers to liabilities created but not yet paid; they include sales taxes, wages andrent payments. This category also includes “other debts” that cover short-term liabilities that don’tfit into the other two categories. Generally, Warren Buffett (Trades, Portfolio) does not see muchbeyond numbers here.
Short-term debt
Including commercial paper and short-termdebt, this line item refers to obligations duewithin one year. For financial firms, there isalways the opportunity to leverage thedifference between short-term and long-termdebt: Borrow short term at say 5% and lend
long term at 7%. But it did not work out so well for Bear Stearns and thousands of lesser-knowncompanies throughout financial history. It also explains why Buffett likes Wells Fargo (NYSE:WFC),which had 57 cents of short-term loans for every dollar of long-term debt, compared to Bank ofAmerica (NYSE:BAC), which had $2.09 at the time of publication. Wells Fargo is far moreconservative than Bank of America, and much more likely to survive a downturn.
Long-term debt due
This is the portion of a long-term debt that becomes due each year. Buffett expects companies witha durable competitive advantage, a moat, will need little or no long-term debt to maintain or growtheir operations. All investors should be concerned about companies that include current long-termdebt commitments with their short-term debt. Beware, too, of too much long-term debt coming duein a single year.
Other current liabilities
The authors wrote nothing for this section, but usually it refers to liabilities that do not fit into thecategories above, but like them are due in the next year. Presumably, Buffett does not see anyinsights arising out of this section.
Total current liabilities and the current ratio
Total current liabilities is the total of all the short-term obligations and the portion of long-term debtcoming due in the next year.
The authors focus on the current ratio, which provides an indication of a company’s liquidity. It iscalculated by dividing total current assets by total current liabilities; a ratio of more than one is agood sign, while a ratio of less than one suggests a company may have trouble meetings its
→
→
→
Symbol Company CurrentPrice Change (%) Gain
(%) P/E
AGN Allergan PLC $ 138.59 -6.82 (-4.69%) -43.17% 0.00
BAX Baxter International Inc $ 74.61 -3.01 (-3.88%) 34% 24.96
HUM Humana Inc $ 227.23 -7.87 (-3.35%) 2.37% 18.71
LLY Eli Lilly and Co $ 116.56 -3.40 (-2.83%) 43.3% 37.71
CMG Chipotle Mexican Grill Inc $ 688.60 -17.88 (-2.53%) 44.37% 108.94
AMGN Amgen Inc $ 183.63 -4.42 (-2.35%) 13.17% 14.56
JPM JPMorgan Chase & Co $ 113.13 2.03 (1.83%) 30.03% 12.60
AAPL Apple Inc $ 202.81 3.56 (1.79%) 44.16% 17.92
SHW Sherwin-Williams Co $ 444.05 -6.42 (-1.43%) 32.68% 38.08
ARCH Arch Coal Inc $ 89.89 1.03 (1.15%) 27.94% 5.86
Summary -1.63% 22.89% 27.93
User Generated Screeners
pjmason14 Momentum
pascal.van.garsse High FCF-M2
kosalmmuse 6
kosalmmuse Best one1
DBrizan all 2019Feb26
kosalmmuse Best one
DBrizan all 2019Feb25
kosalmmuse Nice
kosalmmuse han
MsDale *52-Week Low
WFC Price Chart
Guru News
Bill Nygren Buys Constellation, S&P Global, Sells 5 in 1stQuarter by Holly LaFon
US Market Indexes Close Higher Tuesday by Julie Young
Buffett on Financial Statements: Balance Sheet Liabilities byRobert Abbott
Jul '18 Oct '18 Jan '19 Apr '19
40
50
1D 5D 3M YTD 1Y 5Y 10Y All
$47.35 (1y: -6%)
13 Retirement BlundersIf you have a $500k portfolio, youshould read 13 RetirementInvestment Blunders to Avoid.
financial obligations.
Yet many companies with durable competitive advantages have current ratios of less than one.Why? Because these companies have “immense” earnings power and usually don’t require thesame “liquidity cushion” as marginal or average businesses. So we should not expect the currentratio to give us reliable indications about a company’s moat.
That covers current liabilities, but, of course, there are also non-current liabilities that must berecognized on the balance sheet:
Long-term debt
This refers to obligations due more than a year ahead, and is a category Buffett takes very seriously.The type of companies he looks for, with durable competitive advantages, usually have little or nolong-term debt. They generate earnings that are more than enough to self-finance their expansions,acquisitions, buybacks or dividends.
Consider these comparisons: strong-moat companies Coca-Cola (NYSE:KO) and Moody’s(NYSE:MCO) could, at the time of publication, pay off their long-term debt in a single year. On theother hand, automakers and no-moat companies General Motors (NYSE:GM) and Ford (NYSE:F)would need more than 10 years to pay off their high levels of long-term debt. We know whereBuffett has invested his money, which is to say that of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B).
Deferred income tax, minority interest and other liabilities
These are the last three lines in the long-term section of liabilities. Deferred income tax is relativelystraightforward and provides little information about durable competitive advantages.
The minority interest line is a complex one: For example, when Berkshire Hathaway boughtNebraska Furniture Mart, it acquired 90% of the shares. According to accounting rules, though,Berkshire could book 100% of Nebraska Furniture Mart’s income on its balance sheet, along withthe assets and liabilities. Minority interest on the balance sheet reflects the 10% of NebraskaFurniture Mart that Berkshire did not buy.
Other liabilities may include obligations such as judgements against the company, non-currentbenefits and derivatives. Again, there is no help in identifying durable competitive advantages.
Total liabilities and the debt-to-equity ratio
Total liabilities is the sum of current and non-current liabilities, essentially everything a companyowes from tomorrow until years into the future.
It also provides data for the debt-to-(shareholders’) equity ratio. Typically, it was used to help figureout whether a company was using debt or equity to finance its operations. In theory, at least,
→
→
→
→
MarineMax and Miller Industries May Be UndiscoveredGems by John Dorfman
Value Ideas
Means Investment Co., Inc. Buys PIMCO Enhanced ShortMaturity Active Exchange-Trad, PIMCO Dynamic IncomeFund, Merck Inc, Sells iShares Core MSCI TotalInternational Stock ETF, Netflix Inc, Nucor Corp by insider
BTIM Corp. Buys Sysco Corp, M&T Bank Corp, ProgressSoftware Corp, Sells SunTrust Banks Inc, BrinkerInternational Inc, iShares Russell 2000 by insider
Meeder Asset Management Inc Buys iShares J.P. MorganUSD Emerging Markets Bond ETF, SPDR BloombergBarclays High Yield Bond, iShares iBoxx $ High YieldCorporate Bond, Sells iShares Core U.S. Aggregate Bond,Vanguard Total Bond Market ETF, Wells Fargo by insider
Jentner Corp Buys Johnson & Johnson, 3M Co, ExxonMobil Corp, Sells iShares Russell 1000 Growth by insider
More By Robert Abbott
Buffett on Financial Statements: Balance Sheet Assets - Apr15, 2019
Buffett on Financial Statements: The Income Statement -Apr 15, 2019
Buffett on Financial Statements: A Window Into Warren'sMind - Apr 12, 2019
Secret Hiding Places: Restructuring Opportunities - Apr 12,2019
Guru Interviews
Interview: Investor Steve Kiel's Answers to GuruFocusReader Questions by Holly LaFon
Transcript: Mohnish Pabrai Interview With GuruFocus -Finding Value in India and the US by Holly LaFon
Mohnish Pabrai Interview With GuruFocus: Finding Value inIndia and the US by Holly LaFon
Ask Arquitos Capital's Steven Kiel Your Investing Questionfor GuruFocus Q&A by Holly LaFon
Top Ranked Articles
Another Lesson on the Perils of Market Timing by TheScience of Hitting
Nintai Investments 1st Quarter 2019 Returns by ThomasMacpherson
Finding Wonderful Businesses: Invert, Always Invert byRupert Hargreaves
Responsible Capitalism: A Reply to Howard Marks byThomas Macpherson
→You May Also Like
Warren Buffett Wants Wells Fargo to Look Beyond WallStreet for Its Next CEO
Finacity Renews a $152 Million IFRS Off-Balance SheetSecuritization for VCNA, Part of Brazilian HeadquarteredVotorantim Group
Recent Analysis Shows Wells Fargo, Public ServiceEnterprise Group, Apartment Investment and Management,Gentherm, Connecticut Water Service, and KalVistaPharmaceuticals Market Influences — Renewed Outlook,Key Drivers of Growth
Wells Fargo Stock Jumps as CEO Tim Sloan Steps Down
Comments
Shelby B. Craft, please post a comment. But first, please upload your picture:
companies with a durable competitive advantage will have enough earnings power for theiroperations and expansion so they have little need for debt and other liabilities. But once again,companies with strong moats defy the meaning of the debt-to-equity ratio. Given their earningspower, they need little or no equity (or retained earnings) on their balance sheet. Instead, they canbuy back shares, make acquisitions or issue dividends with their earnings.
For example, at the time of publication, Moody’s, a company with a durable competitive advantage,required no shareholders’ equity on its books, so it used that cash to buy back shares. And itbought back so many shares it had negative shareholders’ equity. That meant its debt-to-equityratio looked like that of General Motors, which has no durable competitive advantage.
Once again, financial institutions are an outlier since they are in the business of borrowing andlending money.
As with the income statement and assets section of the balance sheet, Buffett uses the liabilitiessection to help find outstanding companies with durable competitive advantages.
Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72hours.
Read more here:
Buffett on Financial Statements: Balance Sheet Assets
Buffett on Financial Statements: The Income Statement
Buffett on Financial Statements: A Window Into Warren's Mind
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
About the author:
Robert AbbottRobert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options-- mainly covered calls and collars with long stocks.
He is a freelance writer, and his projects include a website that provides information for new andintermediate-level mutual fund investors (whatisamutualfund.com).
As a writer and publisher, Abbott also explores how the middle class has come to own bigbusiness through pension funds and mutual funds, what management guru Peter Drucker calledthe "unseen revolution." In his book, "Big Macs & Our Pensions: Who Gets McDonald's Profits?"he looks at the ownership of McDonald’s and what it means for middle-class retirement income.
Visit Robert Abbott's Website
Rating: 5.0/5 (1 vote)
Voters:
Subscribe via Email Subscribe RSS
Source
Styles Format
Facebook and Google Are Most-Bought Stocks of InvestingGurus in 4th Quarter
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus ChartsGuruFocus Affiliate Program: Earn up to $400 per referral. Learn More· FAQ· Join the affiliate program
Send replies to me via email
I'm not a robotreCAPTCHAPrivacy - Terms
Post Comment
I'm not a robotreCAPTCHAPrivacy - Terms
Post Comment
More GuruFocus Links
Source
Styles Format
Latest Guru Picks Value StrategiesWarren Buffett Portfolio Ben Graham Net-NetReal Time Picks Buffett-Munger ScreenerAggregated Portfolio Undervalued PredictableETFs, Options Low P/S CompaniesInsider Trends 10-Year Financials52-Week Lows Interactive ChartsModel Portfolios DCF CalculatorRSS Feed Monthly NewslettersThe All-In-One Screener Portfolio Tracking Tool
Home About Jobs Advertise Site Map Term of Use Privacy Policy RSS Mobile App Email Alerts Referral Program Affiliate Program FAQ Contact Us Sign Out
© 2004-2019 GuruFocus.com, LLC. All Rights Reserved.
Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security.The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report andinformation herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out ofthe use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lostopportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does itconstitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC. Stockquotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.