During Study Skills class we were given assignment to visit web page of qura.com and choose any article according to our interest and then analyse it with bloom taxonomy . I dedicated mine to the quite wise topic in particular to fundamental analysis , those are quite famous in entrepreneurship but mostly they are used in financial industry to predict the value of investment on a stock. It's used by many major companies and of course there is variety of methods of using it .That's why I decided to analyze article which is dedicated to Warren Buffett's analyses of intrinsic value of the companies .
I will start with explanation of philosophy of Waren Buffett . He follows Benjamin Graham school of value investing .Value investing is the philosophy of investing in a security when its share price undervalues its intrinsic worth. There is no universal way of determining intrinsic value most common is fundamental analysis of the company. In these particular method investor working as bargain hunter he or she buys stock which is undervalued by market , stock that are valuable but not recognized as such by the majority of buyers . Buffet took whole these philosophy to absolutely another level. The majority of value investors don't support efficient market hypothesis ( is an investment theory that states it is impossible to "beat the market"(- A: "Beating the market" means trying to earn an investment return greater than that of the S&P 500 index) only way investor can make money is by taking more riskier investments ) but they still believe that market will eventually recognize those stock. Buffet deals with whole situation absolutely differently he doesn't think about market activities at all he considers each as whole. He chooses stock based on its overall potential as business and holds it as long term investment. He is unattached to stock value on a market he looks for a ownership of a qualitative company which further may bring earnings to him.
Buffett methodology based on six major points which he usually asking himself to evaluate intrinsic stock .Those things not only the analysis but also things he looking in his companies.
1.Has the company consistently performed well?
Usually to understand performance of the company Buffett looks for ROE which stands by return on equity (is the amount of net return of as percentage of shareholders equity) , also is referred to " return stakeholders investments" he looks on it in order to find out how company performed for whole time , whether company was growing consistently and compares these data to companies in the same industry.
2.Has the company avoided excess debt?
Here he checks for companies debt/equity ratio he prefers to see small total liabilities in relation to shareholders equity. Bigger total liabilities might result volatile expenses and large interest expenses.
Equation for calculation of debt/equity:
Total Liabilities/Shareholders Equity
3.Are profit margins high?
Having a good profit margin means that company executing it self well but increasing profit margin means that management of the business is on a high level too.
4.How long has company being public?
Buffet usually invest in companies which was around at least for ten years . For that reason he not invest in majority of modern technological companies as they are stood on the market only for several years. Another reason that he doesn't invest in things which he not understand, and he openly
admits that he doesn't understand what nowadays technological companies do.
5.Do the company products rely on commodity?
Buffett looks for products which are unique in their industry or at least that those are hardly replicable. If companies product have any characteristics which is hard to replicate then it have bigger competitive advantage in compare to other companies in their industry.
6.Is the stock selling to 25% to its real revenue?
It is always important to have five previous assets into company but except of that main criteria of choice for Warren Buffett is liquidation value these means what will be companies worth if it would be broken and sold today. Also If companies intrinsic value measurement is at least 25% higher than companies market capitalization , Buffett sees these company as worth of investment.
From my research I can understand that Warren Buffett is working by scheme buy on a lower price and sell by a higher. But his real secret in determination and evaluation of intrinsic value of particular company.He is not similar to the majority of traders as he looking not for a market value but for business as whole , those long term activities one of the major reason which brought to him his billions.
All previous points which were mentioned are widely used threw the investors and might be used by anyone for checking intrinsic value and possibly gaining profit .
Usually to understand performance of the company Buffett looks for ROE which stands by return on equity (is the amount of net return of as percentage of shareholders equity) , also is referred to " return stakeholders investments" he looks on it in order to find out how company performed for whole time , whether company was growing consistently and compares these data to companies in the same industry.
2.Has the company avoided excess debt?
Here he checks for companies debt/equity ratio he prefers to see small total liabilities in relation to shareholders equity. Bigger total liabilities might result volatile expenses and large interest expenses.
Equation for calculation of debt/equity:
Total Liabilities/Shareholders Equity
3.Are profit margins high?
Having a good profit margin means that company executing it self well but increasing profit margin means that management of the business is on a high level too.
4.How long has company being public?
Buffet usually invest in companies which was around at least for ten years . For that reason he not invest in majority of modern technological companies as they are stood on the market only for several years. Another reason that he doesn't invest in things which he not understand, and he openly
admits that he doesn't understand what nowadays technological companies do.
5.Do the company products rely on commodity?
Buffett looks for products which are unique in their industry or at least that those are hardly replicable. If companies product have any characteristics which is hard to replicate then it have bigger competitive advantage in compare to other companies in their industry.
6.Is the stock selling to 25% to its real revenue?
It is always important to have five previous assets into company but except of that main criteria of choice for Warren Buffett is liquidation value these means what will be companies worth if it would be broken and sold today. Also If companies intrinsic value measurement is at least 25% higher than companies market capitalization , Buffett sees these company as worth of investment.
From my research I can understand that Warren Buffett is working by scheme buy on a lower price and sell by a higher. But his real secret in determination and evaluation of intrinsic value of particular company.He is not similar to the majority of traders as he looking not for a market value but for business as whole , those long term activities one of the major reason which brought to him his billions.
All previous points which were mentioned are widely used threw the investors and might be used by anyone for checking intrinsic value and possibly gaining profit .
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