You think you know what Debt to Equity is? Think again, Warren Buffett does it different, find out how: 🤯
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Equity or Shareholders Equity is what belongs to the stock owners after the Total Liabilities are deducted from the Total Assets. The Traditional Debt to Equity ratio tells us if a company uses debt or its earnings to finance its operations. Typically, strong companies will use their earnings and not debt. The problem with the traditional calculation is that strong companies will often have little to no Equity or Retained Earnings left because they use it on stock repurchases-these buybacks reduce the equity and retained earnings balances. This also increases their debt-to-equity ratio which makes them look like a mediocre business. However, if we tweak the debt-to-equity calculation and add back in the Net Stock Repurchases (Treasury Stock) we can discover companies with a durable competitive advantage. Warren has found that companies with less than specific ratio of Debt-to-Equity (adjusted) typically have a durable competitive advantage. It is important to note that financial institutions such as banks are highly leveraged meaning they will have high debt-to-equity ratios. In these types of companies, it is always good to compare them to each other and the company with the smaller debt-to-equity is typically the one Warren favors. In our Balance Sheet Tables we display the Debt to Equity Ratio in Green if it meets Warren’s standards and Red if not.
