How Buffett Picks Stocks | Spotting Durable Companies in the Financial Statements
Warren Buffett built his wealth by choosing companies with strengths that rivals find hard to copy and that last for decades, then holding them for the long term. This article explains how to spot those durable companies from the numbers in their financial statements, and what happens when the checklist is applied to actual Berkshire holdings.
30-second read
The key points in 5 slides — enough to get the whole picture.
Buffett's Track Record in One Minute
Over the 61 years from 1965 to 2025, the stock of Berkshire Hathaway, the company Buffett ran, rose at an average pace of 19.7% a year. That is roughly twice the 10.5% annual average of the (with dividends).
A gap of about 9 percentage points a year becomes enormous when compounded over 61 years. $100 at the end of 1964 would have grown to about $6.1 million in Berkshire stock, versus about $46,000 in the S&P 500.
From the end of 1964 to the end of 2025, Berkshire stock gained 6,099,294%, compared with 46,061% for the S&P 500 (with dividends). It did not win every year, however. In 2025, Berkshire stock rose 10.9% while the S&P 500 rose 17.9%.
Key investments behind the record
See's Candies (1972)
Berkshire bought this West Coast chocolate maker for about $25 million. It was a small company with annual sales of about $30 million at the time, but its brand was strong enough that customers stayed even when prices rose. The cash it generated was used to invest in other companies.
Coca-Cola (1988)
Berkshire started buying in 1988 and had invested a total of about $1.3 billion by 1994. As of the end of June 2026 it still holds 400 million shares and continues to collect dividends every year.
Apple (2016 onward)
Buffett viewed Apple less as a technology company and more as a consumer brand whose products users won't give up. Even after Berkshire sharply reduced its stake from 2023 onward, Apple remains its largest stock holding.
Features of his approach
Buffett's approach can be summed up in five points.
- Invest only in businesses you understand: He does not invest in a company unless he can explain how it makes money and whether it will still be making money 10 years from now.
- Choose companies whose strength lasts: He focuses on companies with strengths that rivals find hard to copy (Chapter 2).
- Buy at a reasonable price relative to the company's value: Even a great company is not worth buying at too high a price.
- Hold for the long term: Wealth grows not from short-term price moves but from the company's profits building up over many years.
- Buy whole companies, not just shares: Berkshire owns many businesses outright as subsidiaries, in insurance, railroads, energy, manufacturing, retail and more. Insurers in particular collect premiums up front and can invest that money until claims are paid. This money has long served as a source of funds for Berkshire's investments.
As a young investor, Buffett followed the teachings of his mentor Benjamin Graham and focused mainly on buying stocks priced far below the company's value. Through deals such as the See's Candies purchase, he broadened his thinking to "buying an excellent company with lasting strength, even at a somewhat higher price." This article explains how to identify such "excellent companies" from their financial statements.
What Is the "Durable Company" Buffett Looks For?
Buffett looks for companies with strengths that rivals find hard to copy, and whose strengths last a long time. This kind of strength is called a "," and strong companies fall broadly into the following three types.
| Type | Examples | Why it is strong |
|---|---|---|
| ① Sells a unique product | Coca-Cola, See's Candies | Consumers choose by name: when they want a cola, they think of Coca-Cola. Even if rivals sell a similar-tasting drink for less, winning those customers away is not easy. As a result, sales hold up even after price increases, and profits stay high. |
| ② Sells a unique service | Moody's (credit ratings), American Express (credit cards) | Companies that issue bonds usually get a rating from a rating agency so investors will buy them, and only a few agencies are trusted worldwide. With credit cards, the more stores accept a card, the more members it attracts, and the more members it has, the more stores accept it. For a new card company to catch up with American Express, which has members and merchants all over the world, would take many years and enormous sums of money. |
| ③ Buys cheap and sells cheap | GEICO (auto insurance, a Berkshire subsidiary), Costco (membership warehouse stores) | These companies provide goods and services people need every day at a lower cost than rivals. GEICO keeps premiums low by selling directly instead of through agents. Even if competitors try to match its prices, the difference in business model makes it hard for them to earn a profit. |
Companies whose strength lies in their people rather than in the company itself are less attractive to shareholders. Investment banks are a typical example. When the earning power rests with talented individual employees, those employees can demand high pay, and much of the profit goes to them. If employees leave and take their clients with them, the company's strength goes too.
This kind of strength is hard to judge just by reading a description of the company. So Buffett checks whether evidence of that strength shows up in the numbers in the financial statements.
What to Look for in Financial Statements: Consistency
The most important part of reading financial statements Buffett's way is to look not at a single year, but at whether roughly 10 years of numbers stay good, year after year, without big swings.
Any company can post good numbers for one year thanks to a strong economy or a temporary surge in demand. But truly strong companies keep posting good numbers, including in bad years. So check whether the following hold up consistently.
- Is profit as a share of sales high every year?
- Has the company had no debt, or very little, for years?
- Can it make money without constantly spending large amounts on R&D or equipment?
- Does it earn a profit every year, and are profits growing over the long run?
There are three main financial statements. The following chapters go through the checkpoints for each.
Income Statement Checkpoints
On the income statement, look at how much of each sales dollar the company gets to keep. Strong companies are less likely to be dragged into price wars, so their profit as a share of sales is higher.
Gross margin
Gross profit is sales minus the cost of buying or making the products sold (cost of goods sold). Gross margin is gross profit as a percentage of sales. A company with a gross margin of 40% or more is likely to have some kind of lasting advantage.
Selling, general and administrative expenses (SG&A)
These include advertising, sales staff salaries and head-office costs. SG&A of 30% or less of gross profit is considered excellent. Many strong companies fall in the 30–80% range. On the other hand, a company where SG&A often approaches or exceeds 100% of gross profit is likely facing fierce competition.
Depreciation
The cost of buildings, machinery and other equipment, spread out over the years they are used and recorded as an expense each year. Buffett believes depreciation should be treated as a real cost. The more equipment-heavy a business is, the higher this ratio tends to be.
Interest expense
Interest paid on borrowings. Operating income is the profit earned from the core business. Strong companies don't rely on debt, so their interest expense is low relative to operating income. Banks and other financial institutions naturally have higher ratios because of the nature of their business, so compare them only with companies in the same industry.
Net margin
Net income is the profit left after all expenses and taxes. A company whose net income exceeds 20% of sales is likely to have a lasting advantage.
Earnings per share (EPS)
Net income divided by the number of shares outstanding. Don't judge by a single year; look at the 10-year trend to see whether it is growing steadily.
Balance Sheet Checkpoints
On the balance sheet, look at whether the company is growing with money it earned itself rather than relying on debt.
Cash
A large cash pile is a good sign in itself, but cash builds up for three main reasons: the company raised it by issuing stock or bonds, it sold a business or assets, or it earned it from its core business.
Long-term debt
Debt due more than one year out. Strong companies earn so much that they can fund expansion and acquisitions with their own money. Check long-term debt over the last 10 years; if there has been almost none throughout, the company likely has a lasting advantage.
Treasury-adjusted debt-to-equity ratio
The debt-to-equity ratio is total liabilities divided by shareholders' equity; the lower it is, the less the company depends on debt. However, a company that does a lot of has its equity reduced by that amount, which makes the ratio look higher than it really is. So the amount removed through buybacks (treasury stock) is added back to equity before calculating the ratio.
Treasury stock
Shares the company has bought back from the market. Having treasury stock is itself a sign of a strong company that can return surplus cash to shareholders.
Return on equity (ROE)
Net income divided by shareholders' equity, showing how efficiently the company used shareholders' money to earn a profit. A high ROE is attractive, but avoid companies that boost ROE by taking on heavy debt.
Cash Flow Statement Checkpoints
On the cash flow statement, look at how much of the profit earned has to be spent on equipment.
(capex) are spending on factories, machinery, stores, systems and the like. A company that must keep spending heavily on equipment to stay competitive has little cash left over even when it is profitable. By contrast, companies with strong brands or services keep generating profits with little capital spending. The guideline is whether a company has stayed within the following levels for many years.
| Capex ÷ net income | What it suggests |
|---|---|
| 25% or less | Even more likely to have a lasting advantage |
| 50% or less | Likely to have a lasting advantage |
| Over 50% | An equipment-heavy business. Look carefully at whether its strength will last |
A single year can swing widely, for example in a year when a large factory is built. Dividing total capex over 10 years by total net income over 10 years gives a number closer to the company's true picture.
Summary Table: The Buffett-Style Checklist
The checkpoints from Chapters 4–6 are gathered in one table below. Don't judge by any single item; combine several and look at the 10-year trend.
Tap a dotted term to see what it means
| Statement | Item | Calculation | Guideline |
|---|---|---|---|
| Income statement | Gross profit ÷ sales | 40% or more for 10 years | |
| Income statement | ratio | SG&A ÷ gross profit | 30% or less is ideal; up to 80% is acceptable |
| Income statement | ratio | Depreciation ÷ gross profit | The lower the better |
| Income statement | ratio | Interest expense ÷ | 15% or less (for consumer goods companies) |
| Income statement | Net income ÷ sales | 20% or more | |
| Income statement | 10-year trend | Growing steadily | |
| Balance sheet | 10-year trend | Almost none, consistently | |
| Balance sheet | Total liabilities ÷ (equity + treasury stock) | 0.80 or less (excluding financial institutions) | |
| Balance sheet | Present or not | Present | |
| Balance sheet | Net income ÷ equity | High, but not boosted by debt | |
| Cash flow statement | ratio | Capex ÷ net income (10-year totals) | 25% or less is especially good; 50% or less is good |
Beikabuzukan automatically scores these 11 items for each company using 10 years of financial results. Right now, 79 companies meet at least 8 of the 11 checks.
Applying the Checklist to Actual Holdings
Applying the checklist to Coca-Cola, Apple and Moody's, three long-term Berkshire holdings, shows that all three meet the guideline on many items, yet none of them passes every item.
As of the end of June 2026, Apple is Berkshire's largest stock holding (about 22% of the total) and Coca-Cola is third (about 11%). Berkshire has held Moody's since it was spun off from its parent company in 2000, and Berkshire itself names it, along with Apple and others, as one of the stocks it holds in concentrated positions for the long term.
| Item | Guideline | Coca-Cola (KO) | Apple (AAPL) | Moody's (MCO) |
|---|---|---|---|---|
| (latest year) | 40% or more | 61.6%○ | 46.9%○ | 68.2%○ |
| Gross margin (10-year range) | Consistently 40% or more | 58.1–62.1%○ | 37.8–46.9%△ | 64.4–69.5%○ |
| ÷ gross profit (latest year) | 30% or less is ideal | 49.2%△ | 14.1%○ | 34.3%△ |
| ÷ gross profit (latest year) | The lower the better | 3.6%○ | 6.0%○ | 9.1%○ |
| ÷ operating income | 15% or less | 12.0%○ | 3.4% (fiscal 2023)○ | 5.5%○ |
| (latest year) | 20% or more | 27.3%○ | 26.9%○ | 31.9%○ |
| growth | Steady growth over 10 years | $1.49 → $3.04 (about 2.0x)△ | $2.08 → $7.46 (about 3.6x)○ | $5.15 → $13.67 (fiscal 2017 → 2025, about 2.7x)○ |
| (latest year) | Almost none | $42.1 billion (about 3.2 years of net income)× | $78.3 billion (about 0.7 years of net income)△ | $7.0 billion (about 2.8 years of net income)× |
| 0.80 or less | 0.80○ (just) | 3.87× | 0.61○ | |
| ÷ net income (10-year totals) | 25% or less | 20.8%○ | 14.7%○ | 11.6%○ |
○ = meets the guideline △ = generally good but with caveats × = does not meet the guideline. The latest year is fiscal 2025 (ended December 2025) for Coca-Cola and Moody's, and fiscal 2025 (ended September 2025) for Apple.
Coca-Cola: high-quality profits, but meaningful debt
Gross margin has stayed at 58% or higher for all 10 years, and capex is only about 20% of net income. It is a textbook example of a company that earns on the strength of its brand. On the other hand, EPS fell below the prior year four times in the 10 years. The main reasons were a one-time tax charge from the U.S. tax reform in fiscal 2017 and lower restaurant and away-from-home demand due to COVID-19 in fiscal 2020. Long-term debt equals more than three years of net income, which falls short of the "almost no debt" guideline.
Apple: excellent numbers, but watch the effect of buybacks
Gross margin has risen from about 39% ten years ago to about 47%, a sign that its strength is growing. The SG&A ratio is a low 14%, and capex is modest. On the other hand, its treasury-adjusted debt-to-equity ratio is 3.87, far above the 0.80 guideline.
This does not mean Apple has too much debt, however. Every year Apple spends large sums buying back its own shares and then them. The treasury-adjusted debt-to-equity ratio adds the treasury stock still recorded on the books back to equity in the denominator.
In other words, at a company that retires its repurchased shares, the more it returns to shareholders, the higher its debt-to-equity ratio appears. In fact, as of the end of September 2025, Apple's cash and investments (about $132 billion) exceeded its combined borrowings and lease obligations (about $112 billion). Apple also spent about $34.6 billion on R&D in fiscal 2025, which differs from the ideal of a company that doesn't need to spend much on R&D.
Moody's: high profits from little equipment
With credit ratings as its "unique service," Moody's has a gross margin of 64% or more and a net margin of about 32%, the highest of the three. Capex is only about 10% of net income. Excluding fiscal 2016, when a one-time settlement charge sharply reduced profit, EPS grew about 2.7x from fiscal 2017 to fiscal 2025. Long-term debt equals about three years of net income, which falls short of the guideline.
Even the companies Buffett chose do not pass every item. The checklist is not a pass/fail test; it is a tool for finding a company's strengths and weaknesses. In particular, items that all three companies meet, such as gross margin, net margin and the capex ratio, can be seen as traits common to durable companies.
When to Buy and When to Sell
Even after you find a good company, results depend on the price and timing of your purchase. In Buffett's approach, there are two situations for buying and three for selling.
When to buy
| Situation | Details |
|---|---|
| When the overall market is falling | Shares of excellent companies tend not to fall as much as other stocks, but over the long run they can still be bought at a good enough price |
| When an excellent company makes a temporary mistake | A price drop caused by a fixable mistake can be an excellent buying opportunity. One example is "New Coke," Coca-Cola's failed 1985 launch of a reformulated product. The condition is that the problem must be one the company can solve |
When to sell
| Situation | Details |
|---|---|
| When a better company is available at a better price | Sell a current holding to free up money to move |
| When the company's advantage looks likely to erode | For example, the arrival of the internet shook the long-standing advantages of newspapers and TV stations |
| When the stock market is in a bubble | When stock prices have risen far above what companies are really worth |
Summary: How to Run a "Buffett-Style Check" on Beikabuzukan
Picking stocks Buffett's way comes down to one thing: confirming, with 10 years of financial numbers, that a company's strength lasts. On Beikabuzukan, you can run the same check with the following steps.
Glossary
- S&P 500
- A stock index made up of about 500 leading large US companies. It is commonly used as a gauge of the overall US stock market.
- Durable competitive advantage
- A strength that competitors find hard to copy and that can last for decades. Warren Buffett compares it to a moat protecting a castle.
- Share buyback
- A company buying back its own shares from the market. Alongside dividends, it is one of the main ways companies return cash to shareholders.
- Capital expenditures (CapEx)
- Spending on things like factories, machinery, stores, and IT systems.
- Gross margin
- Gross profit as a percentage of revenue, where gross profit is revenue minus the cost of buying or making the products sold (cost of goods sold).
- SG&A expenses
- The costs of selling products and running the company, such as advertising, sales staff salaries, and head-office expenses.
- Depreciation
- The cost of assets such as factories and machinery, spread out as an annual expense over the years they are used.
- Interest expense
- The interest a company pays on its borrowings.
- Operating income
- The profit earned from a company's core business. It is calculated by subtracting cost of goods sold, SG&A, and other operating expenses from revenue.
- Net margin
- Net income, the bottom-line profit after all expenses and taxes, as a percentage of revenue.
- EPS
- Net income divided by the number of shares outstanding. It shows how much profit was earned for each share.
- Long-term debt
- Borrowings that are due more than one year from now.
- Treasury-adjusted debt-to-equity ratio
- Total liabilities divided by shareholders' equity with treasury stock added back. The adjustment removes the effect of share buybacks making equity look smaller than it otherwise would.
- Treasury stock
- A company's own shares that it has bought back from the market and holds rather than retiring them.
- ROE
- Net income divided by shareholders' equity. It shows how efficiently a company uses shareholders' money to generate profit.
- Share retirement
- Canceling shares a company has bought back. This reduces the number of shares outstanding, and no treasury stock remains on the books.
Sources
- Mary Buffett and David Clark, "Warren Buffett and the Interpretation of Financial Statements" (guidelines and concepts in Chapters 2–7 and 9)
- Investment returns: article on Berkshire Hathaway's 2025 annual report (Yahoo Finance)
- Investment returns: article on Berkshire Hathaway's 2025 annual report (Sahm Capital)
- Biography (Biography.com)
- Biography (Wikipedia)
- Key investments and the Coca-Cola stock purchase (Bankrate)
- The See's Candies investment (Quartr)
- See's sales at the time of acquisition (einvestingforbeginners)
- See's cumulative profits (Syfe)
- CEO transition (CNBC, January 1, 2026)
- Holdings (as of end of June 2026, per the 13F filed August 14, 2026): Holdings Channel
- Holdings (as of end of June 2026): Forbes
- Chapter 8 figures: calculated from each company's annual financial data (fiscal 2016–2025). Gross profit and SG&A follow the data provider's classifications. Apple has not reported interest expense separately since fiscal 2024, so fiscal 2023 figures are used
This column is for informational purposes only and does not recommend buying or selling any particular stock. Please make investment decisions at your own discretion and risk. Figures are based on publicly available information as of October 2026.