5 Ways Warren Buffet Uses To Identify Good Stocks

Is the company conservatively financed?

One of the best ways to discover whether your investment in a stock will bring back you some assured returns is to look at the company’s debt management. It is a good sign if the company does not carry a long-term debt as that indicates it has a strong competitive advantage (as it will spin off a lot of cash). Buffett always looks at the company’s ability to pay off debt out of its earnings as early as possible.

Proposed Criteria: Long-term debt burden should be less than 5x current net earnings and ideally less than 2x – in case of a financial services firms.

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Does the business consistently earn a high rate of return on shareholders’ equity?

Buffet’s aim behind every investment is to earn a good return. So he likes to invest only in those firms which have provided a consistent Returns On Equity (ROE) of 15percent or higher to its shareholders.

Proposed Criteria: 10 year average ROE should be around 15percent or above.

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