How Warren Buffet Looks at Gross Profit Margin to Pick Businesses

40% or better indicates a competitive advantage.

Warren Buffet does not believe in stocks; he believes in great businesses.

Companies using debt and equity produce goods and services—the ultimate aim for a company is to earn cash with a rate of return above current interest rates.

In the long run, the price of a stock share traded in the stock market reflects a company's success in creating cash from its operations. Let me elaborate this a little more:

If a business keeps making profits, we can say that the company is good at creating value, which is ensured by constant customer demand. This stable profit flow of the company proves company's ability to survive and grow through the years.

To identify stable and competitive businesses with ten years of track record coming from a company's financial statements is used.

Let's look at two good companies who are at the same time the competitors and see who is the better in terms of gross profit margin:

Below you have Coca-Cola, Inc.'s gross profit margin ratios over 2012-2022

Below you have PepsiCo's gross profit margin ratios over the same time frame.

While Coca-Cola's gross profit margin fluctuates between 63%-58%, PepsiCo's ratio has been between %52-%56. This means Coca-Cola surprises PepsiCo in gross profit margin terms.

Indeed you need to look at other financial metrics to decide better which stock you should choose for your value-investing portfolio!

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