WARREN BUFFETT’S INCOME STATEMENT RULES OF THUMB

Tacettin İKİZ · March 30, 2025, 05:52:50 PM

WARREN BUFFETT'S INCOME STATEMENT RULES OF THUMB

By Brian Stoffel – Interpreted and Structured for Practical Use

Metric	Formula	Rule of Thumb	Interpretation
Gross Margin	Gross Profit / Revenue	> 40%	A high gross margin means the company has strong pricing power and efficient cost of goods sold. Lower margin industries (e.g., retail) must rely on volume.
SG&A Margin	SG&A / Gross Profit	< 30%	Selling, General & Administrative expenses should be controlled. A lean operation keeps SG&A low relative to gross profit.
R&D Margin	R&D / Gross Profit	< 30%	For tech and pharma companies, R&D is vital — but Buffett avoids companies that overspend on uncertain innovation.
Depreciation Margin	Depreciation / Gross Profit	< 10%	High depreciation may indicate heavy capital investment. Buffett favors businesses that don't need constant reinvestment.
Interest Margin	Interest / Operating Income	< 15%	Companies heavily burdened by interest payments are risky. Strong businesses finance growth with retained earnings, not debt.
Tax Margin	Taxes / Pre-Tax Income	≈ Corporate Tax Rate	Avoid companies that depend on temporary tax loopholes. Sustainable businesses pay a normal tax rate.
Net Income Margin	Net Income / Revenue	> 20%	A consistently high bottom-line margin shows a company can turn revenue into real profit — a key Buffett trait.
EPS Growth	Year 2 EPS / Year 1 EPS	Positive & Growing	Earnings per share should grow steadily. Look for consistent upward trends, not one-time spikes.

Why These Ratios Matter

• Buffett seeks predictable, durable, and profitable companies — the kind that generate excess cash without needing constant reinvestment or incurring debt.

• These rules help filter out businesses with weak fundamentals, poor cost control, or financial red flags.

• Use these benchmarks to compare companies in the same industry, not across unrelated sectors (e.g., SaaS vs. manufacturing).

Bonus Tip: Apply these ratios over 5–10 year periods to check for consistency. A one-year outlier doesn't make a great business — but long-term discipline does.

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WARREN BUFFETT’S INCOME STATEMENT RULES OF THUMB

Tacettin İKİZ