April 11, 2025 l Manila Times
When I first started reading “The Interpretation of Financial Statements” by Warren Buffett and his longtime business partner Mary Buffett, what struck me was how clearly it laid out something most people find overwhelming. Financial statements can look like a mess of numbers and jargon, but once you know what to look for, they tell a story — a very real one about how strong or weak a business actually is. And if you’re looking to invest in a company or even just trying to figure out how to steer your own company in a better direction, understanding that story is everything.
Buffett doesn’t believe in investing based on hype or news headlines. He looks at businesses like a farmer looks at soil. He wants to know: Will this yield strong crops year after year? Financial statements — especially the income statement, balance sheet and cash flow statement — are how he checks. These aren’t just forms you file or skim over. They show you the character of a company. Is it making real profits? Is it drowning in debt? Is it spending more than it earns? The answers are right there if you know how to read them.
One of the biggest lessons from Buffett is that he looks for consistency and long-term strength. Take the income statement. It tells you whether a company’s making money, how much it’s spending to do that and what’s left over. A company might show growing revenue, which sounds great, but if its costs are growing even faster, profits shrink. That’s not a business you want to bet on. On the other hand, if a company keeps a steady profit margin — say 15 to 20 percent — over many years, that’s a good sign. It means they’re doing something right, whether it’s strong branding, good management or a competitive edge.
Then there’s the balance sheet, which shows what a company owns and owes. Buffett loves companies with low debt. If a business can fund its growth through its own earnings instead of borrowing heavily, that’s strength. He also looks at return on equity (ROE), which shows how well a company turns shareholder money into profits. A high ROE is great, but only if it’s coming from strong operations and not just taking on more debt. This distinction is something you miss if you only look at surface-level numbers.
Cash flow is another part that can’t be ignored. A company can report profits and still be in trouble if it’s not actually collecting cash. Buffett puts a lot of weight on free cash flow — the money left after all expenses and investments. That’s the cash available to reinvest, pay dividends or just build up reserves. If a company generates steady free cash flow, that’s a big green flag.
Why does all this matter when forming a strategy? Because numbers reveal what’s working and what’s not. If you’re leading a company and you see that your margins are shrinking year over year, you can’t afford to ignore it. That’s a signal to review your pricing, your operations, maybe even your product line. If your debt is climbing but returns aren’t improving, it’s time to step back and rethink how you’re financing growth. On the flip side, if you’re seeing strong cash flow and rising returns, maybe it’s time to double down and expand.
This way of thinking also helps when you’re looking to invest in other companies. Buffett doesn’t go for flashy tech startups or fast-growing but unstable businesses. He sticks with what he calls “economic moats” — companies with a clear edge that lets them stay ahead. Think Coca-Cola, which has been around for over a century, or Apple, which generates massive profits, thanks to its ecosystem of devices and services. These companies show strong fundamentals across all three financial statements. They don’t just grow — they grow efficiently, and they do it year after year.
Another example is Costco. Its profit margins aren’t sky-high, but it runs on a rock-solid business model. Its members pay upfront to shop there, which gives Costco predictable income. Its costs are tightly managed. The result? A company with a strong balance sheet and healthy cash flow, even in tough times. Buffett sees that and invests.
There’s also the lesson that not all growth is good. Sometimes companies grow too fast, take on too much debt or stretch themselves thin. Financial statements will show this, often before the problems blow up. Looking at Lehman Brothers before the 2008 crash, for example, you’d have seen massive leverage on its balance sheet. It was a red flag, and those who understood the risks avoided disaster.
So, whether you’re running a business or thinking of investing in one, the message is the same: Learn how to read the numbers. Don’t get distracted by glossy branding or big promises. Look at profits, debt, cash flow. Watch how those numbers move over time. Are they stable? Are they improving? Are they hiding something?
Warren Buffett’s approach works because it’s based on reality. Financial statements don’t lie. They reflect choices, priorities and the direction a business is heading. When you understand them, you’re not guessing anymore — you’re seeing clearly. That kind of insight isn’t just useful. It’s powerful.
***The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX. For comments, email rey.lugtu@hungryworkhorse.com. Photo is from Pinterest.