Here are 9 financial “rules of thumb” that Warren Buffett uses to tell if a company has one: 1: Gross Margin Formula: Gross Profit / Revenue Moat: Consistently above 40% No Moat: Under 40% & volatile 2: Sales, General, and Administrative Expenses Formula: SG&A / Gross Profit Moat: Consistently under 30% No Moat: Over 80% & volatile 3: Depreciation Expense Formula: Depreciation / Gross Profit Moat: Consistently under 10% No Moat: Volatility & high 4: Interest Expense Formula: Interest Expense / Operating Income Moat: Consistently under 15% No Moat: Over 50% & volatile 5: Income Tax Expense Formula: Income Tax Paid / Pre-tax Income (Earnings Before Tax) Moat: Consistently pays the full amount (~21% in U.S.) No Moat: Negative, erratic 6: Profit Margin (Net Margin) Formula: Net Income / Revenue Moat: Consistently above 20% No Moat: Below 10%, negative, and volatile 7: Capital Expenditures Formula: Capital Expenditures / Net Income Moat: Consistently under 25% No Moat: Consistently above 75% 8: Total Liabilities to Adjusted Shareholder Equity Formula: Total Liabilities / Shareholder Equity Moat: Below 0.80 No Moat: Over 2.00 9: Return on Shareholders’ Equity Formula: Net Income / Shareholder Equity Moat: Consistently above 15% No Moat: Below 10%, negative, or volatile 3 Important notes: a) These “rules of thumb” are only useful when a company is fully optimized for profits (phases 4 & 5). B) CONSISTENCY is key The real test is if a company generates good numbers over multiple years & various economic cycles C) There are PLENTY of exceptions & nuances to these rules Many of Buffett’s largest holdings do not pass every rule of thumb. That’s because investing & accounting have TONS of nuances. Source: Brian Feroldi, LinkedIn