Warren Buffett: How To Analyze An Income Statement (7 Rules)

Warren Buffett utilizes seven specific rules of thumb to evaluate a company's financial health through its income statement, focusing on metrics that signal competitive advantage and operational efficiency. Key indicators include maintaining a gross margin above 40% to demonstrate pricing power, keeping selling, general, and administrative expenses below 30% of gross profit, and ensuring research and development costs remain under 30% of gross profit to highlight business simplicity. Additionally, interest expense should stay below 15% of operating income, while net profit margins exceeding 20% suggest a strong economic moat. Applying these criteria to Apple reveals that the company consistently meets or exceeds these benchmarks, particularly in its robust profit margins and growing earnings per share, which explains its status as a primary holding within the Berkshire Hathaway portfolio.