Warren Buffett: How To Analyze a BALANCE SHEET (Brian Feroldi)
Here’s what the video “Warren Buffett: How To Analyze a
BALANCE SHEET” from the Long Term Mindset channel, hosted by Brian Feroldi, is
all about:
What the Video Covers
- Balance Sheet Overview: The video begins
by breaking down the balance sheet into its key components—assets,
liabilities, and shareholders' equity—which reflect a company’s financial
position at a specific point in time (YouTube).
- Buffett’s Rules of Thumb: Brian Feroldi
outlines a set of quick, practical rules inspired by Warren Buffett for
evaluating financial health via the balance sheet (YouTube,
Galaxy
AI). These rules serve as quick diagnostic tools rather than following
detailed formulas.
- Real-World Example: The video applies
Buffett’s rules in practice by analyzing Chipotle’s balance sheet,
demonstrating how to assess real companies with these guidelines (YouTube).
- Purpose: The goal is to allow
investors—especially beginners—to assess a company’s strength quickly and
intuitively without getting lost in accounting complexities.
Buffett's Rules of Thumb
Summarized
Drawing from Feroldi’s broader content and referenced
threads, here are the most commonly cited rules aligned with the video’s focus:
Balance Sheet Rules:
- Cash > Debt — The company should have
more cash than debt, signaling strong liquidity.
- Adjusted Debt-to-Equity < 0.80 — This
indicates a conservative capital structure, relying more on equity.
- No Preferred Stock — Avoids complex
financing that may dilute or complicate equity ownership.
- Positive & Growing Retained Earnings
— Reflects profitability and reinvestment.
- Presence of Treasury Stock — Suggests
management is returning capital to shareholders.
(en.rattibha.com, Investguiding)
These rules provide quick “red flag” or “green flag” signals
when scanning through balance sheets.
Context: Why Buffett’s
Approach Works
- Rigorous Detail: Buffett emphasizes a
thorough reading of financial disclosures—the “turn every page” method—to
uncover insights others may miss (Investopedia).
- Practicality & Moats: He champions
simple, repeatable rules to evaluate financial resilience and competitive
advantage (i.e., moats) swiftly and reliably (cksn.brianferoldi.com,
en.rattibha.com).
Quick Recap
| Step | What to Look For | Why It Matters |
|---|---|---|
| 1⃣ | Cash exceeds debt | Indicates strong liquidity and less reliance on borrowing |
| 2⃣ | Low adjusted debt-to-equity | Conservatively financed companies often weather downturns better |
| 3⃣ | No preferred stock | Avoids financial structuring that could complicate or reduce shareholder value |
| 4⃣ | Growing retained earnings | Shows income is being saved and reinvested |
| 5⃣ | Treasury stock | Suggests active capital return and confidence from management |
Final Thoughts
This video delivers high-value, no-nonsense guidance for
investors who want to gauge a company's financial health quickly—Buffett style.
By emphasizing simple ratios and financial structure rather than chasing flashy
metrics, Feroldi teaches us to focus on stability, sustainability, and
stewardship.
Want to go deeper? I can walk you through each rule using example companies or how to apply these principles when reviewing financial statements yourself. Just say the word!
Yes
Alright — let’s go deeper and make this Buffett-style balance sheet checklist
practical so you can apply it to any company.
1. Cash > Debt
- What to do: Look at the company’s Cash
& Cash Equivalents and compare it to Total Debt (both
short-term and long-term).
- Buffett logic: If cash is higher, the
company can pay off all debt tomorrow if needed.
- Example: If Chipotle has $1.2B in cash
and $0.5B in debt → ✅ Safe liquidity.
2. Adjusted Debt-to-Equity
< 0.80
- Formula:
Debt-to-Equity=Total Liabilities – Current LiabilitiesShareholders’ Equity\text{Debt-to-Equity}
= \frac{\text{Total Liabilities – Current Liabilities}}{\text{Shareholders’
Equity}}Debt-to-Equity=Shareholders’ EquityTotal Liabilities – Current Liabilities
- Why adjust? Buffett often excludes current
liabilities like accounts payable because those are part of normal
operations, not dangerous debt.
- Buffett logic: Low D/E means the company
isn’t overly reliant on borrowed money to grow.
- Example: If adjusted D/E is 0.45 → ✅
conservative capital structure.
3. No Preferred Stock
- Why Buffett cares:
- Preferred
stockholders get paid before common shareholders.
- It
can dilute returns and create obligations that act like debt.
- Check: On the balance sheet under Equity,
see if “Preferred Stock” has a zero value.
4. Positive & Growing
Retained Earnings
- Definition: Retained earnings =
cumulative profits the company keeps rather than pays out as dividends.
- Buffett logic:
- Positive
→ The company has been profitable over time.
- Growing
→ Profits are increasing and being reinvested wisely.
- Example: If retained earnings rose from
$8B to $12B in three years → ✅ strong sign.
5. Presence of Treasury Stock
- Meaning: Shares the company has bought
back from the market and holds in its own treasury.
- Buffett logic:
- Shows
management believes shares are undervalued.
- Reduces
shares outstanding, increasing ownership % for existing shareholders.
- Check: Found under Equity as a
negative number (cost of shares bought back).
Buffett’s Quick Scan Method
- Open
the balance sheet (Yahoo Finance, Annual Report, etc.).
- In
under 2 minutes, check:
- Cash > Debt ✅
- Adjusted D/E < 0.80 ✅
- Preferred Stock = $0 ✅
- Retained Earnings positive & growing
✅
- Treasury Stock present ✅
- If
all 5 are green → move on to deeper research (income statement, cash flow,
competitive advantage).
If you want, I can take the
company from the video (Chipotle) and actually calculate all 5
Buffett rules so you can see them in action. That way, it’s not just theory —
you’ll see the numbers.
Do you want me to run that calculation for Chipotle?
Yes!
Let’s apply those five Buffett-style balance sheet checks to
Chipotle Mexican Grill (CMG) using its latest
data—which as of year-end December
31, 2024—gives us the most up-to-date and consistent snapshot (Zacks,
StockAnalysis).
1. Cash > Debt
- Cash & short-term investments:
$1,422.9 million (approximately) (Macrotrends,
Zacks).
- Total debt (primarily lease obligations):
$4,540.6 million (Seeking
Alpha, Yahoo
Finance).
- Verdict: Cash is less than debt.
Result: Red flag — Chipotle does not have enough cash to cover its total debt obligations.
2. Adjusted Debt-to-Equity
(excluding current liabilities) < 0.80
- Total liabilities (all, including
leases): $5,548.8 million (Macrotrends,
Yahoo
Finance).
- Current liabilities: $1,168.8 million (Macrotrends,
Zacks).
- Adjusted (long-term) debt: $5,548.8 –
$1,168.8 = $4,380 million.
- Shareholders’ equity: $3,655.5 million (Macrotrends,
Yahoo
Finance).
- Ratio: $4,380 ÷ $3,655.5 ≈ 1.20.
- Verdict: Ratio well above 0.80.
Result: Red flag — indicates a higher leverage and reliance on borrowing.
3. No Preferred Stock
- Preferred stock value: “0” on the balance
sheet (Zacks,
StockAnalysis).
- Verdict: No preferred stock is
outstanding.
Result: Green flag — avoids the complexity or potential dilution of preferred shares.
4. Positive & Growing
Retained Earnings
- Retained earnings (Dec 2024): $1,574.2
million (Macrotrends,
Zacks).
- In Dec 2023: $6,057 million? This looks
anomalous — possibly due to restatement or reporting differences. But
other sources consistently place retained earnings at $1,574 million for 2024 (StockAnalysis,
Zacks).
- Trend: Between 2022 and 2024, retained
earnings rose from $4,828 million to $1,574 million—that’s inconsistent
and likely reflects varied accounting or data formats. The more consistent
trend shows positive retained earnings
overall over time (Macrotrends,
Zacks).
- Verdict: Retained earnings are positive, though the upward trend is
unclear due to apparent reporting discrepancies.
Tentative result: Green flag for positivity; caution on trend clarity.
5. Presence of Treasury Stock
- Treasury stock: Zero in 2024; though
previous years show significant treasury stock (e.g., 2023: $4,945
million) (StockAnalysis,
Zacks).
- Verdict: In 2024, no treasury stock is recorded.
Result: Neutral/Red flag — absence now doesn’t reflect current active buybacks, though substantial repurchases had been done earlier.
Summary Table
|
Buffett Rule |
Chipotle (Dec 2024) |
Evaluation |
|
1. Cash > Debt |
No (1,423 < 4,541 million) |
Red flag |
|
2. Adjusted Debt-to-Equity < 0.80 |
No (≈ 1.20) |
Red flag |
|
3. Preferred Stock = 0 |
Yes |
Green flag |
|
4. Retained Earnings Positive & Growing |
Positive (trend unclear) |
Green (with caution) |
|
5. Treasury Stock Present |
Not in 2024 |
Neutral/Red flag |
Final Thoughts
Chipotle scores 2 green,
2 red, and 1 neutral on Buffett’s quick scan:
- Strengths: No preferred stock, positive
retained earnings — good signs of sound shareholder structure and
profitability.
- Concerns: Weak liquidity (cash short of
debt), high leverage (adjusted debt-to-equity over 1.0), and no recent
treasury stock activity suggest potential areas of caution.
Buffett would likely press
“Continue” here but then move into deeper analysis—examining cash
flows, free cash flow generation, income quality, and the business’s
competitive moat (e.g., customers’ loyalty to Chipotle’s brand and unique
operational model).
Would you like to dig into Chipotle’s cash flow statement next to see how well they handle debt servicing? Or maybe compare these snapshots to a peer like Qdoba or Taco Bell? Just say the word!