Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage

by Mary Buffett

Intel is a perfect example of a company that has a low ratio of SGA expenses to gross profit, but that because of high research and development costs has seen its long-term economics reduced to just average. Yet if Intel stopped doing research and development, its current batch of products would be obsolete within ten years and it would have to go out of business. Goodyear Tire has a 72% ratio of SGA expenses to gross profit, but its high capital expenditures and interest expense—from the debt used to finance its capital expenditures—are dragging the tire maker into the red every time there is a recession. But if Goodyear didn’t add the debt to make all those capital expenditures/improvements, it wouldn’t stay competitive for very long. Warren has learned to steer clear of companies cursed with consistently high SGA expenses.