Follow Buffett's lead in the crypto world! 10 hard stock selection indicators that anyone can learn at a glance (with the "Profit Formula" mnemonic)

Today, let’s talk about the 10 most important indicators Buffett considers when selecting stocks,

All straightforward language that ordinary people can understand! Actually, stock picking isn’t that complicated,

Focus on a few key numbers,

Combine them with common sense in daily life,

And your success rate can be greatly improved.

1. Profitability: ROE consistently above 20%

What is ROE? Simply put, it’s “the efficiency of making money with shareholders’ funds.”

For example, if you invest 1 million yuan to open a store,

and earn 200,000 yuan net profit in a year,

ROE is 20%.

Buffett says,

Companies with ROE over 20% for 5-10 consecutive years are likely “top students”—indicating they can earn more with limited capital,

and not relying on luck,

but real skill!

For example,

Moutai’s ROE has been above 30% for many years,

which means if you invest 1 million yuan,

it can help you earn 300,000 yuan annually,

and this can continue for many years,

showing strong competitiveness.

But note,

don’t just look at one year’s data,

look at long-term stability,

sudden spikes and drops are likely tricks.

2. Product profit margin: Gross profit margin > 60%,

Cost control must be strict!

Gross profit margin is “how much profit you make per 100 yuan sold.”

For example, if you sell buns,

each bun sells for 10 yuan,

costs 4 yuan,

gross profit is 6 yuan,

gross profit margin is 60%.

Buffett requires gross profit margin to be over 60%,

why? Because only with enough profit margin

can you withstand risks! For example, raw material prices rise,

you still have room to lower prices and promote sales; if competitors engage in price wars,

you won’t be afraid of losing money.

High-end liquor brands like Kweichow Moutai,

Wuliangye, etc.,

can have gross profit margins of 70%-80%,

even with heavy advertising expenses,

they still make huge profits.

Conversely,

if a company’s gross profit margin is only 30%,

and there are slight fluctuations (like rent increases,

labor costs rising),

it might start losing money,

we avoid such companies.

3. Actual net profit: Net profit margin > 20%,

Don’t just chase hype!

Net profit margin is more tangible,

meaning "after deducting all costs,

how much net profit do you make per 100 yuan."

For example, that bun shop,

gross profit margin 60%,

but if rent,

labor,

taxes add up to 40 yuan,

net profit margin drops to only 20%.

Buffett requires at least 20% net profit margin,

indicating the company not only makes money,

but also “saves money”—high management efficiency,

not wasting money.

Some companies look good in revenue,

like internet companies with heavy subsidies,

their gross profit margin is decent,

but net profit margin is always single digits,

or even losing money,

these are “virtual fat.”

We don’t pick these.

Look at Walmart,

with supply chain management, net profit margin is about 3%-4%,

but they operate on thin margins with high volume,

Buffett wouldn’t invest,

he prefers “high gross profit + high net profit” with “double high” indicators,

like Laoganma,

whose net profit margin exceeds 25%,

and the money is truly in their pocket.

4. Is the price expensive? PE ratio < 14,

can recover the investment within 14 years

PE (Price-to-Earnings ratio) is “how long it takes to recover your investment based on profit.”

For example, a company with a market cap of 1.4 billion yuan,

and annual profit of 100 million yuan,

PE is 14,

meaning it takes 14 years to earn back the money spent to buy it.

Buffett prefers PE below 14,

thinking it offers good value.

Of course,

different industries have different standards,

for tech stocks, PE might be higher,

but for traditional and mature companies, if PE exceeds 20,

be cautious,

it might be too expensive.

A common misconception: don’t buy just because PE is low,

look at whether the company can earn steadily.

If a company earns 100 million this year,

but might lose 50 million next year,

a PE of 10 isn’t worth it,

because there’s no guarantee of recovery.

Buffett wants “cheap + stable,”

like Coca-Cola,

whose PE has been around 15,

and earns steadily every year,

making it reliable.

5. Generous dividends: Dividend yield > 5%,

Real cash returns to shareholders

Dividends are “company profits paid out to shareholders.”

For example, if you buy stocks worth 1 million yuan,

and receive 50,000 yuan annually,

the dividend yield is 5%.

Buffett believes,

companies that can sustain high dividends,

are first of all genuinely profitable (where does the money come from?),

and secondly, responsible to shareholders.

American banks,

Coca-Cola,

pay dividends of 3%-5% annually,

and have done so for decades.

But note,

growth-oriented companies may not pay dividends,

they reinvest profits to expand,

which is normal.

However,

if a mature industry company

never pays dividends and claims “reinvesting for growth,”

be cautious—either the money is not transparent,

or they haven’t really earned it.

6. Industry position: Must be the “leader”

Buffett only focuses on the “big boss” or “second in command” in each industry.

Why? Because the leader has pricing power,

can set rules,

and others find it hard to shake.

For example, Gree in air conditioners,

Moutai in liquor,

SF Express in logistics (though now slightly declining,

but if Buffett invested in logistics,

he would prioritize the leader).

Industry leaders, even if they make mistakes,

have a margin for error.

For example, if a small company develops a new technology,

the leader can buy it out,

turning a threat into an advantage.

But small companies facing crises

may be eliminated altogether.

So remember: when choosing stocks, follow this rule: better to be the chicken’s head than the phoenix’s tail.

7. Brand recognition: A “hard brand” everyone knows

A brand means "no need for explanation,

everyone trusts it."

For example, when buying soy sauce,

first think of Haitan; when buying milk,

think of Yili or Mengniu; when buying toothpaste,

think of Yunnan Baiyao.

Such brands come with built-in traffic,

consumers are willing to pay more,

which is “brand premium.”

Buffett bought Coca-Cola because of its “globally recognized” brand power.

Even if the formula stays the same,

just relying on the brand can keep earning money.

Conversely,

companies that rely on low prices to compete,

with little brand recognition,

once costs rise,

they can only lower prices,

profits thin out,

and long-term sustainability is hard.

8. Healthy cash flow: Can “generate its own blood,”

not rely on borrowing

To evaluate a company,

don’t just look at the income statement,

also check “whether it has cash in hand.”

For example, a company earns 1 billion yuan,

but accounts receivable (money owed by others) is 1.5 billion,

and it needs to borrow 500 million to pay wages,

which is “fake profitability.”

Buffett prefers companies where “earnings are all cash,”

that don’t need to borrow to expand.

How to see? Check “net cash flow from operating activities,”

this number is usually positive,

and can cover investment and debt repayment needs,

indicating the company can “generate its own blood.”

For example, Apple,

with hundreds of billions in cash,

doesn’t need to borrow,

can do whatever it wants,

making it highly resilient.

9. Can “raise prices at will”: Not afraid of inflation, “hard currency”

Truly good companies,

have a “privilege”: when costs rise,

they can also raise prices,

and consumers are still willing to buy.

For example, Moutai,

when raw material prices increase,

directly raises the ex-factory price,

sales volume remains unchanged; luxury brands,

raise prices every year,

and still attract more buyers.

This shows they have “pricing power,”

relying on brand,

technology, or exclusive resources.

Conversely,

companies selling everyday goods,

like towels or socks,

can’t raise prices when costs go up,

if they do, consumers switch to other brands,

and they have to absorb the costs themselves,

shrinking profits.

Such companies find it hard to survive inflation periods,

and Buffett definitely wouldn’t choose them.

10. Low debt: Don’t carry a heavy burden of debt

Asset-liability ratio is “the proportion of borrowed money to total assets.”

Buffett prefers companies with low debt,

for example, asset-liability ratio below 30%.

High-debt companies,

like real estate firms,

rely on borrowing to expand,

if interest rates rise or sales decline,

they risk a liquidity crisis.

Of course,

some industries naturally need debt,

like banks,

insurance companies,

but for ordinary manufacturing and consumer goods companies,

high debt levels are a warning.

For example, a company with assets of 10 billion yuan,

and debt of 8 billion,

means most of its money is borrowed,

and it has to pay interest on a large part of its earnings,

which is very risky.

We prefer companies with “cash in hand, no debt,”

solid and reliable!

Summary: Stock picking is like choosing a partner,

it should be “pleasing to the eye and reliable.”

Simplify these 10 indicators into 4 sentences:

High profit: gross profit margin > 60% (sell expensive, control costs well),

net profit margin > 20% (earn a lot after all expenses);

Low price: PE ratio < 14 (buy cheap, recover quickly);

Deep moat: industry leader,

strong brand,

ability to raise prices,

good cash flow (others can’t take away its business);

Reliable: low debt,

generous dividends (don’t mess around, treat shareholders well).

For ordinary investors, stock selection doesn’t require analyzing complex financial reports,

just focus on these key numbers: gross profit margin,

net profit margin,

PE ratio,

ROE,

dividend yield,

and combine with common sense (like whether you would buy this company’s products,

or if people around you recognize the brand),

then you can eliminate 90% of bad companies.

Remember: good companies are “simple and easy to understand,”

no need for expert analysis,

you can see how they make money at a glance,

these are the companies worth holding long-term.

Finally, a word: stock picking isn’t that mysterious,

Buffett’s method is essentially "pick top students,

buy at low prices,

hold for the long term."

If ordinary people follow this approach,

not necessarily to make big money,

at least they can avoid many pitfalls,

and gradually build wealth.

But the number of investable targets is very limited.