Buffett Scorecard – 13 Financial Criteria for Stock Analysis

The 13 Criteria – Explained

Each criterion tests a specific aspect of business quality. The thresholds are based on Buffett's published letters and Brian Feroldi's financial statement analysis framework.

1 Gross Margin > 40% — Pricing power and brand strength. Companies sustaining 40%+ gross margin have a durable competitive moat. Examples: Apple 43%, Microsoft 70%, Coca-Cola 60%. Income

2 SG&A Margin < 30% — Low sales & marketing spend relative to gross profit signals a strong brand pull. Companies that must spend heavily to maintain revenue lack a true moat. Income

3 R&D Margin < 30% — High R&D signals competitive advantage must be constantly re-won (e.g. pharma, semiconductors). N/A if company has no R&D — not penalized. Income

4 Depreciation Margin < 10% — Low depreciation relative to gross profit means the business doesn't need heavy physical infrastructure. Asset-light businesses naturally pass this. Income

5 Interest Expense < 15% of Operating Income — Heavy interest drains the business and creates vulnerability in recessions. No interest expense (no debt) → automatically passes. Income

6 Tax Rate 10–35% — A reasonable effective tax rate confirms earnings are real taxable income, not accounting artifacts or offshore arrangements. Income

7 Net Margin > 20% — Buffett's threshold for a truly great business. Consistent 20%+ net margin is very hard to sustain without a durable competitive moat. Income

8 EPS Growing Year-over-Year — Current EPS greater than prior year EPS, both positive. Validates that earnings per share are consistently expanding — the foundation of long-term stock appreciation. Income

9 Cash > Total Debt — Company could pay off all debt today. Buffett strongly prefers net cash companies — no financial stress, maximum flexibility for acquisitions and buybacks. Balance

10 Adj. Debt/Equity < 0.80 — Total Liabilities ÷ Total Equity below 0.80 means the company is mostly equity-financed. Highly leveraged companies are fragile in economic downturns. Balance

11 No Preferred Stock — Preferred shareholders rank above common shareholders. Preferred stock adds complexity and drains returns from common shareholders. Balance

12 Retained Earnings Growing — Growing retained earnings means the company builds intrinsic value over time by reinvesting profits effectively. Buffett's See's Candies example. Balance

13 Capex < 25% of Net Income — Great businesses require little capital to maintain earnings. High capex means the company must reinvest heavily just to stay competitive — a weak moat signal. Cash Flow

How to Interpret the Score

🏆

Score 11–13: Exceptional

Buffett-grade business. Durable competitive moat, strong margins, healthy balance sheet. Examples: Visa, Microsoft, Coca-Cola at their best years.

💪

Score 8–10: Strong

High-quality business with minor weaknesses. Worth deeper analysis. May have heavy R&D (tech) or slightly elevated debt but otherwise excellent fundamentals.

⚖️

Score 5–7: Average

Decent business but lacks strong moat characteristics. Could be a cyclical or capital-intensive company. Price matters more here — needs a larger margin of safety.

⚠️

Score <5: Below Threshold

Buffett would likely avoid this business. Weak margins, high debt or declining earnings signal fragility. Not necessarily a bad investment — but requires a different framework.

Important: Score ≠ Buy Signal

A Buffett Scorecard score of 13/13 does not automatically mean you should buy the stock. Buffett himself says price is what you pay, value is what you get. A perfect business at a terrible price is still a bad investment.

Combine the Buffett Scorecard with the Extended Valuation report (P/FCF, SBC-adjusted P/E, ROIC) and the FCF Yield screen for a complete picture. A score of 9+ combined with P/FCF below 20 is a genuinely rare and compelling combination.

Run Buffett Scorecard on all S&P 500 stocks →

Warren Buffett Scorecard13 Financial Criteria Explained