The Buffett Score was developed by Ash Anderson and is based upon the book, Buffettology. In its current form, The Buffett Score is made up of nine different criteria. It is then run against 6,000+ stocks that are traded in the United States. Those that score on all nine criteria are listed on this site.
The remainder of this page goes into detail about the nine criteria, but we’d definitely recommend that anyone interested check out the book Buffettology. It’s a very well-written guide on the Oracle of Omaha himself that investors of all types can benefit from reading.
The Buffett Score Explained
All criteria listed are simply pass/fail. There is no partial credit given, even if a company does not have sufficient data available. There are nine (9) total points a company can get. As mentioned, all companies listed on the home page have scored a nine. That does not necessarily make them investable, and an investor should still perform their own due diligence.
All data on this site is presumed to be correct, but definitely double check as things can change as time passes. Scores are updated monthly.
The Company Should Have Consistent Earnings
Yes, that means non-profitable high-growth firms are excluded right away. When looking for quality, however, we should be looking for firms with proven earnings. To get a passing grade on this score, a company’s TTM earnings per share should be the same or higher than five years ago.
With this score, if a company only has two or three years of earnings we allow that company to pass too, as long as it’s not showing drops in EPS.
The Company Should Have Manageable Debt
One way of checking this is to look at a company’s debt-to-equity ratio. Ideally, this would be less than 1. Debt-to-equity doesn’t always tell the whole story though, so the Buffett Score does things a little differently and asks if a company’s debt is less than 3x net income.
As an example, if a company makes $1B per year in net income with debts of $2.5B it gets a passing mark here. If that debt creeps up to $3.5B, it would not receive a point.
The Company Should Have A High Return on Equity
Buffett fans know that the Oracle looks for companies with great returns on equity, so that’s why the point is included here. We look for firms that are exceeding 15% ROE. This 15% is a number that’s been tweaked with, but 15% seems to be the fairest value to run across companies from all industries.
The Company Should Have A High Return On Invested Capital
For this one we’re looking to see a number north of 12%. If the company can return 12% or more on invested capital, it gets the point. As I’m sure you know by now, all companies listed on the homepage surpass 12% ROIC.
The Company Should Produce Cash
High-quality investors should love cash and that’s exactly what this point checks for. It is the simplest of all points on the list. All a company has to do is show that it has free cash flow over the last twelve months. Easy, right?
The Company Should Not Be Issuing Shares
This one covers dilution. Companies we invest in should not be diluting our investment away via new share issuance. There are times where share issuance is necessary, but overall it is a negative for investors and not something that high-quality businesses should be making a habit of.
To get a passing grade on this score, a business must have the same or fewer shares outstanding than they did five years ago.
A Company’s Earnings Yield Should Exceed The 10Yr Treasury
Yes, another easy one. When lumped in with all else though it definitely helps bump the number of stocks down a little bit. This one also has the benefit of preventing investors from finding way overpriced stocks. Emphasis on the “way” there given how low the 10yr has been the past few years.
As an example, a company with $15 of earnings that trades for $200 a share has a 7.5% earnings yield (15/200). This is more than the 10yr rate, so that company would get a pass.
The Company Should Have An Expected Rate of Return Over 12%
The calculation here differs based on available data. Sometimes we use the analyst recommendations, sometimes we use a company’s historical growth rate, and others we just use the dividend yield and share buyback rate. Ultimately we’re looking to make sure that there’s some path to the company in question returning 12% per year.
As mentioned, this is not fool-proof. There could be issues with our data, and we’re also not making assumptions, just running things quantitatively. Always do your own valuations of stocks before blindly jumping in.
Finally, A Company Should Have Outsized Cash Returns
We’ve already checked that the companies have free cashflow. This score checks that the free cashflow they have is of a high-quality. To calculate that, we sum up the last five years of cashflows and divide them by the companies assets. If the result is greater than 1, it’s a pass.
As an example, assume a company’s FCF over the last five years is $5 per share. Assets are $4 per share. This results in a value of 1.2 (5/4) which is a passing score.
Those are the nine criteria that all stocks on the homepage of BuffettScore.com passed. As a reminder, we update this site on a monthly basis to keep things fresh. If you’d like to be updated when that update occurs, please sign up via email below. No spam, we don’t have the time for that, just a list of stocks and perhaps a few funny quips about the market once a month.