Warren Buffett and the Interpretation of Financial Statements Determining if a Company Has a Durable Competitive Advantage

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Warren Buffet and the interpretation of financial statements

Zarnigor Nabieva

Intermediate Accounting 2200

John Jastremski

10/22/2021

Introduction:

Warren Buffet is a well-known and highly successful investor of all time; he is

considered a legend in investing field, and his holding company Berkshire Hathaway has a

market capitalization of around 600 billion dollars. Warren Buffet has accumulated substantial

wealth over the period and is one of the richest persons in the world. His way of investing funds

is unique and is discussed among investors all over the world. Generally, Warren Buffet invests

his funds for a longer period, and some of the holdings are as old as a few decades. Warren

Buffet invested in Coca-Cola in 1988 and still holds the stock and has no plans to sell the stock.

The style is focused on finding value. He was finding a value that lasted for decades. This has

been a key factor in the success of Warren Buffet and his holding company Berkshire Hathaway.

(Burton, 2018)

Roku TV:

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Roku TV is one of the pioneered streaming to the TV Company where users are allowed

to watch multiple online streaming companies on one platform. The streaming devices are highly

innovative and so much popular among the American population, and it provides a unique

opportunity for both online streaming companies and advertisers as well. This ongoing pandemic

has accelerated the growth of Roku TV as the general public was forced to stay at home. The

company has seen tremendous growth over the period with good profit margins. All of the

mainstream online streaming platforms are available at Roku TV. Roku TV has a market

capitalization of around 45 billion dollars and is expected to grow further in the coming years.

Over the years, the trend of watching movies in the cinema has been shifting to watching

all those movies on television at home. The idea at first seems vague, but good content on online

streaming platforms has captured a huge audience over the years. Netflix is one of the leading

online streaming platforms and is one of the top clients of Roku TV. As the company is highly

popular among the local population, the revenue growth is substantial and beats the expectations

of the market. (Mohajeri et al., 2019)

Warren Buffet's Strategy:

Warren Buffet invests for the long term and invests in those companies which offer value

for a longer period, and as far as Roku TV is concerned, Warren Buffet has not invested in the

company, but financial numbers are good enough to capture his attention. Warren Buffet usually

invests in those companies which have long-term growing revenue and healthy balance sheet

with fewer loans and all other liabilities and a business model which is reliable and has the

potential for longer-term growth. Investing model of Warren Buffet usually represents those

companies and their products which are in the use of the general public as a whole, and the

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product should be unique with some competition or zero competition. Unique and highly popular

products are always admired by legendary investors. Warren Buffet usually focuses on a single

source of information while deciding if he wants to invest in the company, and this source is a

financial statement. Warren Buffet usually does not care about any political news disturbing

markets, or even market crashes don't seem to bother the legendary investor. As Warren Buffet

invests for the long term, short-term gains or losses are not in question for him. Whenever he

was asked about his investing strategy or style, he humbly replied with one single sentence: look

for a company that can maintain a good number even after a decade. So, whenever you try to

look for a company with a mindset of investing your money for more than a decade, then a lot of

questions will get answered. (Burton, 2018)

There are no specific items that are looked focused on by Warren Buffet in a financial

statement of a company to invest in but all of the financial statements as a whole. As we have

some insights on Warren Buffets' strategy, we are going to look at which items from the Income

statement, Balance Sheet, Cash-Flow Statement are most important from an investment

perspective.

Income Statement:

Sales/Revenue: Revenue is one of the most important to look at while analyzing any

company's growth or current financial position of the company. Before the pandemic, Roku TV

was showing a moderate and substantial growth of around 20 to 30 percent year every year. But

after the pandemic, the general population was not allowed to go out, and the sales growth

number doubled over the last few years. Recent sales numbers were around 1778 million dollars

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which were higher than last of year number of sales around 1129 million dollars. This is a

growth of around 57 percent. Sales growth was around 52 percent in last year as well.

Cost of Goods Sold: Cost of goods sold or cost of sales is the second most important

number to look into while analyzing the financial statement. As the revenue is growing, the cost

of sales also grows with revenue. The cost of goods sold directly affects the profitability of the

company, and if the cost of goods sold is not in the line of revenue growth, then it will hurt the

profitability of the company. As far as Roku TV is concerned, the cost of goods sold is underline

with the growth of revenue over the last few years. This is a good sign for a company as the cost

is rising conservatively as compared to revenue growth.

Net Profit: Net profit is the final and one of the most important parts of the company's

income statement. Roku TV is not making any profit over these years of revenue growth, but as

far as the future is concerned, the company has shown some growth in its net income, which was

-60 million dollars for the last year and -18 million dollars in the recent year, which is substantial

growth and if the company will be able to manage these number in the future, then the company

will be in profit in coming years. (Lane & Milesi-Ferretti, 2018)

Conclusion: As far as revenue and cost of sales are concerned, the numbers are quite

promising, and growth is substantial, but the net income is a fact which needs to get better as the

profitability is very important for the investors to look at it as a long-term investment tool.

Investors like Warren Buffet are less likely to get impressed by the growth if the company is

unable to achieve profit in a certain period. So, the company needs to improve its profitability

(Kaltenbrunner & Painceira, 2018).

Balance Sheet:

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Total Assets: When analyzing the balance sheet, Total Assets are the most important part

of the analysis; the total assets of the company also increased substantially over the last few

years. The company owns around 1470 million dollars of assets in the last and 2271 million

dollars of assets in the current year. The asset growth is remarkable and shows the strong

financial position of the company. The growth has been unbelievable in the last few years, and

this is the driving force of the company's good-performing stock on the stock market.

Current and Non-Current Liabilities: Current and non-current liabilities show how much

the company is in debt and Roku TV's current liabilities stands at 520 million dollars, and total

current and non-current liabilities stand at 943 million dollars which consist of a huge part of the

balance sheet as most of the value is consisted of debt including short-term and long-term debt.

Both the current and non-current liabilities have increased substantially over the period and have

seen a bigger growth in recent years.

Shareholder's Equity: Shareholder's Equity of Roku TV stands at 1328 million dollars

which almost doubled if we at the previous number, which stands at 698 million dollars. The

total growth of shareholder's equity is around 58 percent which is very good growth.

Conclusion: All of the numbers from the balance sheet gives an impression of the strong

financial position of the company, but the investors who tend to invest for a longer period and

specifically Warren Buffet, who invest in companies with the strong financial position, will look

into the current liabilities and non-current liabilities of the company. As the debt is high, and also

the debt is growing at a faster pace because the revenue and all of the operations of the company

have seen substantial growth over recent times. Warren Buffet will like to wait until the company

is able to manage its debt and reduce its debt so it will not be a concern in the future as

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companies with high debt are always vulnerable to the future uncertainty, which away those

investors who look to invest for a longer period in a stable company. (Chen & Komal, 2018)

Conclusion: Roku TV is a household name in America and is one of the fastest-growing

companies in the country as well. Warren Buffet is a legendary investor who invests for a longer

period, and if we look at the portfolio of Berkshire Hathaway, which is owned by Warren Buffet,

all of the companies have a strong balance sheet with strong profitability and also good dividend

yield. Roku TV lacks in a few points which we discussed, and investors like Warren Buffet

would like to wait before he invests in the company.

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References

Burton, N. (2018). An Analysis of Burton G. Malkiel’s A Random Walk Down Wall Street. Macat

Library.

Mohajeri Moghaddam, H., Acar, G., Burgess, B., Mathur, A., Huang, D. Y., Feamster, N., ... &

Narayanan, A. (2019, November). Watching you watch: The tracking ecosystem of over-

the-top tv streaming devices. In Proceedings of the 2019 ACM SIGSAC Conference on

Computer and Communications Security (pp. 131-147).

Lane, P. R., & Milesi-Ferretti, G. M. (2018). The external wealth of nations revisited:

international financial integration in the aftermath of the global financial crisis. IMF

Economic Review, 66(1), 189-222.

Chen, S., & Komal, B. (2018). Audit committee financial expertise and earnings quality: A meta-

analysis. Journal of Business Research, 84, 253-270.

Kaltenbrunner, A., & Painceira, J. P. (2018). Subordinated financial integration and

financialisation in emerging capitalist economies: The Brazilian experience. New

political economy, 23(3), 290-313.

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