Warren Buffett on Manipulation of Profit Numbers

Warren Buffett on Manipulation in his annual shareholder letter, Warren Buffett shares a wide range of investment insights and macroeconomic musings. But what’s more impressive, at least to this corporate American writer, is his refreshingly candid and natural style.

Buffett’s writing style combines a touch of humor, a keen sense of leadership principles, and a dry wit. It’s a great read, especially if you share my own fascination with Berkshire Hathaway and its leader.

Profit Numbers

Buffett believes that profit numbers can be easily manipulated, especially by managements. This is why he and his vice-chairman Charlie Munger frequently cringe when analysts celebrate managers who beat expectations.

He thinks that the most important metric to assess a company is not the amount of profit but its owners earnings, or cash flow for shareholders. This number is a much more important measure of a company’s financial performance than net income or earnings per share (EPS).

A common way to manipulate profit numbers is by excluding certain one-off expenses. This allows companies to report higher profits than they would otherwise. However, it can also paint a false picture of how a company is operating.

Gross Profits

Buffett does not like to see profit numbers manipulated. So considers that one of the most disgusting activities a businessman can engage in.

He prefers high gross profit margins as a signal that a company is a good performer. He also looks for consistency in these numbers.

Another factor that makes a big impression on Buffett is the amount of net earnings a company has earned over time. This metric is important because it indicates that the company has a durable moat, or competitive advantage.

Durable advantages should be very difficult to duplicate. That could mean a strong brand, a unique product or impressive economies of scale.

Finally, Buffett likes companies with little or no debt. He also does not like to see a lot of selling, general and administrative expenses as a percentage of the company’s gross profits.

Net Profits

When it comes to determining the financial health of your company, net profit is an important figure. This sum is the amount of money that’s left over after all expenses are deducted from total revenue.

As a result, you can use net profit to help determine how much revenue your business can bring in and whether it’s profitable enough to keep growing. If you see that your net profit is low, it’s important to evaluate your business model and strategies to find ways to improve the numbers.

Buffett says that companies need to be more cautious about how they record their profits, as many of them manipulate those numbers to make themselves look better. That’s why Buffett pays attention to a number called free cash flow, which is the cash a company generates after it pays for all expenses and taxes.

Buffett also pointed to Berkshire’s stakes in two big corporations that are paying dividends, Coca-Cola and American Express. He noted that Berkshire had originally invested $1.3 billion in Coca-Cola and piled another $1.3 billion into American Express on December 31. Those companies paid $704 million and $302 million in dividends to Berkshire last year, respectively.

Earnings Per Share

The famous investor and Berkshire CEO Warren Buffett has called out executives who manipulate their companies’ profit numbers. He called it “disgusting” and one of the shames of capitalism.

He points out that top managers have used restructuring charges, asset sales, and revaluations to beat Wall Street’s numbers. It’s a dirty practice that requires no talent, and only a desire to deceive.

Buffett also slams executives who buy back shares for a company to manipulate its share price. He said: “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue.”

While he takes a long-term approach, Buffett makes selective contrarian investments. He uses his investment criteria to identify good companies and then buys millions of shares.