Warren Buffett’s Method

Checklist & Calculations

Name of Company and Stock Symbol: ____________________________

PART 1 – Is the Company a Right Pick for Buffett?

Yes  No  Does the company have a strong durable competitive advantage?

Yes  No  Do stores need to carry the product the company makes to stay in
business?

Yes  No  Does the product have a consumer monopoly?

Yes  No  Can the company continue to raise the prices of its product to keep
up with inflation?

Yes  No  Does the company have to continually make upgrades to their

plants/factories for their products?

Yes  No  Does the company make a product or provide a service that will not
go obsolete?

Yes  No  Does the company make a product or provide a service that will still
be sold during a recession?

Yes  No  Does the company make a product or provide a service that has little
competition?
 PART 2: Numbers at-a-Glance
(see morningstar.ca for this free information)

Yes  No  Is there a strong upward trend in Earnings per Share (EPS) for the
past 10 years?

Yes  No  Is the Return on Equity (ROE) above 15 % for the past 10 years?

Yes  No  Is the Average Return on Invested Capital (ROIC) above 12 % for the
past 10 years?

Yes  No  Is the Long-Term Debt less than 5 times Net Income?

Yes  No  Is Free Cash Flow positive?

Yes  No  Is the company buying back shares year to year?

PART 3 – Is the Price of the Stock a Cheap Price?

STAGE A: Compute the Initial Rate of Return

1. Divide the company’s EPS by the current stock price. This will give the
investment’s initial rate of return.

𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝒑𝒆𝒓 𝑺𝒉𝒂𝒓𝒆 (𝑬𝑷𝑺)

𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝒓𝒂𝒕𝒆 𝒐𝒇 𝒓𝒆𝒕𝒖𝒓𝒏 = 𝒙𝟏𝟎𝟎 = __________%
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑺𝒕𝒐𝒄𝒌 𝑷𝒓𝒊𝒄𝒆

2. Compare the initial rate of return to the return being paid by a

government bond (such as, a treasury bond). If a government bond is
better, then the stock may be overpriced (and remember, a government
bond has no risk).

10 year Government (Treasury) Bond Rate: __________ %

Yes  No  Is the initial rate of return better than a long-term government bond?
STAGE B: Compute the expected annual rate of return using
the Return on Equity (ROE) method.
ROE describes how much profit a company makes for each dollar of shareholder equity:

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐸 =
𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟 𝐸𝑞𝑢𝑖𝑡𝑦

1. a) Determine the average ROE for the past 10 years

(add the 10 ROE’s and divide by 10): Ave. ROE: ______%

b) Determine the average dividend payout ratio

for the past 10 years: Ave. Payout Ratio: ______%

c) Find the Sustainable Growth Rate by

doing the following calculation:

Ave. ROE (1 – Ave. Payout Ratio) = ______%

2. Project the Future Book Value:

# of years (10)
𝑭𝒖𝒕𝒖𝒓𝒆 𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 = 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑽𝒂𝒍𝒖𝒆 (𝟏 + 𝒊)𝒏

Present Book Value

Growth rate from Step 1(c)
From morningstar.ca
above (as a decimal)

Future Book Value = __________

 3. Convert the Projected Future Book Value into a Future Earnings per Share (EPS):

Future EPS (in 10 Years) = Future Book Value (in 10 yrs) x Average ROE
from Step 1(a) above

Future EPS (in 10 Years) = __________

4. Determine the Future Stock Price: Price/Earnings Ratio

Future Stock Price = Future EPS (in 10 years) x P/E Ratio

* Use the average P/E ratio for the past 10 years (or the current one if lower)

Future Stock Price (in 10 Years) = __________

5. Determine the Expected Rate of Return using this Average ROE Method:

𝑭𝒖𝒕𝒖𝒓𝒆 𝑺𝒕𝒐𝒄𝒌 𝑷𝒓𝒊𝒄𝒆 = 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑺𝒕𝒐𝒄𝒌 𝑷𝒓𝒊𝒄𝒆(𝟏 + 𝒊)𝒏

Now we need to
solve for this

Expected Rate of Return using the ROE Method = ________%

STAGE C: Compute the expected annual rate of return using
the Earnings per Share (EPS) method.

EPS measures the amount of profit earned per share of stock:

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝐸𝑃𝑆 =
# 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

1. Determine the Current EPS and the EPS Growth Rate from the last 10 years:

Current EPS = ________

EPS growth rate for past 10 years = ________%

2. Determine the EPS 10 years from now:

# of years (10)

𝑭𝒖𝒕𝒖𝒓𝒆 𝑬𝑷𝑺 = 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑬𝑷𝑺(𝟏 + 𝒊)𝒏

EPS 10 years EPS growth rate in
Current EPS
from now Step 1 (as a decimal)
in Step 1

Future EPS in 10 Years from now = __________

3. Determine the Future Stock Price (in 10 years from now): Price/Earnings Ratio

Future Stock Price = Future EPS (in 10 years) x P/E Ratio

EPS calculated
in Step 2 above

* Use the average P/E ratio for the past 10 years (or the current one if lower)

Future Stock Price (in 10 Years) = _________

4. Determine the Expected Rate of Return using this EPS Method:

10 years

𝑭𝒖𝒕𝒖𝒓𝒆 𝑺𝒕𝒐𝒄𝒌 𝑷𝒓𝒊𝒄𝒆 = 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝑺𝒕𝒐𝒄𝒌 𝑷𝒓𝒊𝒄𝒆(𝟏 + 𝒊)𝒏

Now we need to
solve for this

Expected Rate of Return using the EPS Method = ________%

STAGE D: Average both ROE and EPS expected returns to
determine if it is worth buying the stock.

Average both the ROE and EPS expected rate of returns:

𝑹𝑶𝑬 𝑹𝒂𝒕𝒆 𝒐𝒇 𝑹𝒆𝒕𝒖𝒓𝒏 + 𝑬𝑷𝑺 𝑹𝒂𝒕𝒆 𝒐𝒇 𝑹𝒆𝒕𝒖𝒓𝒏

𝟐

Overall average Rate of Return using both methods = _______ %

If the final overall average rate of return is:

1. Greater than 20% - Then Buffett considers this to be a FANTASTIC return

2. Between 12% and 20% - Then Buffett considers this to be a GOOD return

3. Less than 12% - Then this is UNACCEPTABLE

It’s time for you to decide: Do you buy the Stock?

Yes  No  Worth looking at another time 