Warren Buffett's Investing Strategies

The assignment delves into the investment strategies employed by renowned investor Warren Buffett. It highlights his emphasis on investing in companies based on their intrinsic value, identifying undervalued assets during market fluctuations. The text emphasizes Buffet's preference for holding a concentrated portfolio of well-understood businesses with strong long-term prospects. Furthermore, it discusses his approach to risk management and the importance of continuous learning and self-improvement.

Ratio Analysis

Contents
Introduction...........................................................................................................................................1
Ratio analysis.........................................................................................................................................1
Gelato’s financial position at end of 2014.........................................................................................2
Gelato’s capital structure ratio in 2015.............................................................................................2
Analysis of financial condition and Performance of Gelato Industries..............................................3
Conclusion.............................................................................................................................................3
Warren Buffet........................................................................................................................................3
Investing Techniques by Warren Buffet.............................................................................................4
Bibliography...........................................................................................................................................4
Introduction
Ratio analysis is a quantitative approach to analysing the financial performance of a
company. The ratios are calculated from the financial statements including income statement,
balance sheet and cash flow statement. Ratio analysis helps in identifying the operating and
financial performance of a company for a specific period (Bajkowski, 1999) Ratio analysis
helps in comparison between two companies and also helps in identifying trends in a
company by comparing the year over year performance.
In the report, a ratio analysis of Gelato industries has been conducted to evaluate its financial
performance for the years 2014 and 2015 and also comparing the ratios with the industry
standards.
Ratio analysis
The ratios categorized into profitability, liquidity, asset management efficiency and capital
structure are presented below:
Ratio 2015 2014
Industry
Average
Profitability Ratio
Operating profit margin 10.5% 9.6% 10%

Return on assets 11.7% 6.1% 11.4%
Return on equity 30.3% 12.2% 9.5%
Liquidity Ratio
Current Ratio 0.9 1.8 2
Quick Ratio 0.2 0.8 0.8
Interest coverage ratio 4.62 3.15 3.8
Asset Management Efficiency Ratio
Average collection period 18.5 days 29.7 days 37 days
Inventory turnover 4.06 3.10 2.5
Total assets turnover 2.05 1.33 1.14
Fixed assets turnover 3.50 2.42 1.4
Capital Structure Ratio
Debt ratio 47% 41% 58%
Gelato’s financial position at end of 2014
The company’s profitability is a little low as compared to the industry average in 2014. The
operating profit margin is near to industry standards but the return on assets is very low as
compared to the industry. This means the company is not utilizing its assets efficiently to
generate revenue. The return on equity is higher than the industry average. This means the
wealth of the shareholders is growing.
The liquidity is also very near to the industry average. The current ratio is a little below 2, the
quick ratio is as good as the industry average and the interest coverage ratio is also very near
to the industry average. The current ratio of more than 1 means that the company has more
current assets than current liabilities and can easily pay for its current obligations. The quick
ratio has decreased to 0.8 implying a lot of funds tied up in inventory. But this is ok as it is
the nature of the industry in which the company operates. The interest coverage ratio also
shows company has 4 times more operating profits to pay for its interest expenses. Thus the
liquidity of the company is good.
The asset management efficiency is also better than the industry standards. All ratios except
average collection period are more than the industry average. The company is managing its
inventory well with turnover of 3 which means inventory is rotated 3 times in a year to
generate sales. The company is using its fixed assets and total assets efficiently as compared
to the industry to generate sales. The overall efficiency of working capital management is
good.

The debt ratio is less than the industry standard which means the company is using less debt
to finance its business operations and investment. This makes the company less risky and
thus solvent.
Gelato’s capital structure ratio in 2015
The capital structure ratios in 2015 are as follows:
Ratios 2015
EPS 1.72
Price-earnings ratio 8.72
Market to book ratio 1.07
Analysis of financial condition and Performance of Gelato Industries
The profitability of the company has improved in 2015 as compared to 2014. The operating
profit margin is as per the industry standards now as a result of increase in sales and the
return on equity has improved drastically to 30% due to increase in net profits. The liquidity
is very low in 2015 and is even below the industry standards. This is because the company’s
short term liabilities have increased due to short term debt and payables. The current ratio is
below 1 which means the current assets are not sufficient to pay for the current liabilities. The
quick ratio is at 0.2 which means the immediate liquidity is extremely low. The interest
coverage ratio has improved due to increase in profit margins. The asset management
efficiency has improved in 2015. All the turnovers are above the industry average. The
average collection period has reduced to only 18 days which means a very good operating
cycle. The company is managing its assets very efficiently to generate sales. The debt ratio
has also improved to 47% and is below the industry average which means the company has
leveraged itself but to an extent that it remains solvent.
Conclusion
From the above we can conclude that Gelato Industries financial performance has been
satisfactory and has improved in 2015 over the previous year. The company’s performance in
terms of profitability, asset management efficiency and capital structure stability is better as

per the industry average. However, only the liquidity has become low in 2015 over 2014 and
is below the industry standards. The company has lot of funds invested in inventory which
makes its immediate liquidity low. Overall the company is performing well.
Warren Buffet
Warren Buffet is known as the ‘Oracle of Omaha’ and he is the chairman of Berkshire
Hathaway, an investment company based on Omaha, Nebraska (Bloomeberg). He is one of
the most successful investors and made his first investment at the age of 11. He believes in
giving most of his fortune to charity. He launched ‘The Giving Pledge’ which encourages
billionaires to donate their wealth in partnership with Bill Gates (Forbes). The total wealth of
Warren Buffet was $75.5 billion as of February, 2017. He was awarded the U.S. Presidential
Medal of Freedom in 2011.
Investing Techniques by Warren Buffet
According to Warren Buffet, an investor should invest in a company based on its intrinsic
value and when the price is at its low. The risk can be reduced by holding a few shares rather
than large number of them. 75% of Berkshire holdings are comprised of five securities
(Hagstrom, 2005). He suggests a stock should be bought when the company is having a
temporary problem leading to a decrease in price or when the stock market is declining. One
of the best examples is that of Coca Cola. Warren Buffet bought the stocks of Coca Cola in
1988 when the company was a cash cow and its shares were trading at a discount as
compared to its intrinsic value. Having considered the brand as one with great future
prospects he bought stocks worth $1 billion and till date he has made great profits from it
(Crippen, 2007). One should invest in stocks that they can understand. Like Warren Buffet
never invested in tech companies as he did not understand how they made. According to him,
it is not necessary to research 1000 of companies, rather search for the ones you can
understand and invest in a few of them. One should study the company facts and look at its
future outlook. One must invest in a company with a long term perspective and not for short
term gains. Like Warren Buffet mentioned he purchased the shares of Wrigley’s chewing
gum because chewing gum will remain in the market for a very long time and no technology
can replace it (Elkins, 2015). Warren Buffet also emphasises on investing on oneself which

means investing in education. One should work towards improving their talents and make
them more valuable (Kirkham, 2015).
To sum up we can say Warren Buffet believes in long term investing of valuable stocks with
high intrinsic value and the portfolio should comprise of only a few good stocks.
Bibliography
Bajkowski, J. (1999). Financial Ratio Analysis: Putting the Numbers to Work. AAII Journal.
Bloomeberg. (n.d.). Warren Buffest: Overview. Retrieved September 10, 2017, from Bloomeberg:
https://www.bloomberg.com/billionaires/profiles/warren-e-buffett/
Crippen, A. (2007, July 19). History Lesson: Warren Buffet's Crazy Coca Cola Bargain Buy. Retrieved
September 11, 2017, from CNBC: https://www.cnbc.com/id/19851070
Elkins, K. (2015, June 24). How Warren Buffet Chooses a Great Stock in 4 Steps. Business Insider.
Forbes. (n.d.). Warren Buffet. Retrieved September 10, 2017, from Forbes:
https://www.forbes.com/profile/warren-buffett/
Hagstrom, R. (2005). The Warren Buffet Way. New Jersy: John Wiley & Sons,Inc.
Kirkham, E. (2015, December 16). 10 Best Money Tips From Warren Buffett of All Time. Retrieved
September 11, 2017, from The Motley Fool:
https://www.fool.com/investing/general/2015/12/16/10-best-money-tips-from-warren-
buffett-of-all-time.aspx