How does Buffett quickly analyze a stock? Buffett often selects companies by analyzing financial statements when choosing stocks. In his book "Tap Dance to Work," he wrote that reporters asked Buffett: Where do your ideas come from? He replied, 'Reading alone is my daily job.'. By reading the annual report, analyze specific financial indicators and conduct preliminary screening. 1. Return on equity This indicator reflects the company's ability to utilize capital, and the commonly used formula is ROE=net profit/average net assets. The return on equity can also be decomposed into three elements using the DuPont analysis method: ROE=net profit margin on sales * asset turnover * financial leverage. As an indicator, it can reflect the overall business situation of the enterprise. Buffett believes that the return on equity should be higher than 15%. (The following standard analysis refers to the financial statements of Kweichow Moutai in 2023 and 2024.). For example, Maotai's net asset return rates in 2023 and 2024 were 34.19% and 36.02%, respectively, with a 2 percentage point increase in net asset return rate. However, considering that Maotai Company has a large amount of cash lying on its books that has not been effectively utilized, the return on net assets excluding cash may reach around 50% in 2024. In other words, Maotai Company will recoup its investment costs within two years. 2. Gross profit margin Gross profit margin=(operating revenue - operating costs)/operating revenue. The gross profit margin of a product directly reflects its profit margin. For example, if a product costs 40 yuan and costs 100 yuan, the gross profit margin would be 60%. Buffett believes that the gross profit margin should be higher than 40%. High gross profit margin means that the product has unique advantages, a relatively wide moat, and strong risk resistance. In the Chinese liquor industry, the gross profit margin is relatively high. Taking Maotai as an example, the gross profit margins in 2023 and 2024 were 92.11% and 92.01% respectively, a year-on-year decrease of 0.1 percentage points. 3. Net profit margin Net profit margin=net profit/operating income, which is actually the actual received profit, which is the profit after deducting all costs and expenses. If a company has a high gross profit margin but high management and sales expenses, it will erode profits and lead to an unsatisfactory net profit. Buffett believes that the net profit margin should be greater than 5%. Taking Maotai as an example in 2023 and 2024, the net profit margin was 49.5% and 51.2% respectively, an increase of 1.7 percentage points year-on-year. Maotai may experience a decrease in management or sales expenses. The above are three criteria for Buffett's stock selection, but analyzing companies goes far beyond these three criteria, including price to earnings ratio, differentiation, and so on.