In one minute, use this prompt to read financial statements like Buffett
The best Buffett prompt
Introduction
ChatGPT, Gemini, Grok or Claude.
They are genies.
Eager to grant your every wish.
But before going “full Aladdin” and making your 3 wishes, an LLM, while genie-like, has to remain in its bottle.
It needs to be constrained.
The bottle represents:
The data you give it
The context you add
An LLM does not think.
You think.
All these models act like genies once you tell them exactly what to do.
Avoid open-ended questions. Avoid asking about sentiment (without defining it precisely).
The more effort and quality you add, the more you will receive.
So, if we want to use it to act like Buffett, we need to tell it how to think like Buffett.
So how does Buffett read financial statements?
How Buffett reads financial statements
Buffett looks for signals that could indicate a long-term competitive advantage. But never forget the importance of price. I don’t think he ever paid more than a P/E of 15.
Let’s do a quick run-down of the 3 financial statements.
Income Statement
From revenue to operating profits
Gross Margins
➡️The gross margin (gross profit/revenue) needs to be high, ideally above 40%.
It could signal pricing power. It provides a cushion for the company when things go sour.
Next, he takes a look at how different operating expenses compare to gross profits between different companies.
He’s looking for companies that are drowning in cash, so the cost structure matters.
SG&A
Selling, General & Admin costs can eat away at profits.
➡️He looks for SG&A/gross profits lower than 30%. The lower the better.
R&D
Phil Fisher loved R&D because it is needed to fuel future growth. But a company that can sustain its future growth with low R&D spending might have something special.
High R&D costs could mean the advantage is temporary, that it is not inevitable, or structural.
➡️Look for R&D/Gross profits < 10%
Depreciation
Depreciation is a cost. You already know he despises EBITDA.
Even worse, the cash was already paid in full at the start of the investment!
Low depreciation costs could mean that it’s a capital-light business. And capital-light business might be more profitable.
➡️Look for Depreciation cost/gross profits < 10%
From operating profits to net profits
Interest expenses
You don’t need the balance sheet. The Income statement can give you a signal of financial health.
High MOAT companies can have debt, but their earnings power is so strong that if they need to, they can pay it back pretty quickly.
➡️Look for Net interest/Operating profit < 10%
Net Income and EPS
Buffett wants a highly profitable company. He wants the company to have a history of rising profitability, not only in terms of the amount but also in terms of earnings per share.
➡️Look for rising income and EPS
Income Before Tax and Normalization
There are no criteria for this, but I wanted to mention 2 important things:
All investments are relative. Buffett likes the income before tax because if he divides it by the market cap, he gets an equity yield. This allows for easy comparison to a bond yield or another company.
When he talks about earnings, he means normalized earnings. We need to remove one-off profits or losses, or even look at the cyclical nature of the business. Don’t just look at the P/E on a screen.
The 10-step checklist based on the income statement:
Balance sheet
Let’s look at some important criteria from the balance sheet highlighted in red.
Cash
Buffett wants companies drowning in cash. So if cash and cash equivalents have been increasing over the last few years, it’s a good sign the company is doing something right.
➡️Look for a steady rise in cash and cash equivalents
Inventory
In the case of a company that holds inventory, a steady increase in inventory over the last few years signals the company is selling more and more products. This is a good sign.
Net receivables
The best companies have a cash conversion cycle that is negative. In other words, they get paid in cash first and only have to pay their own suppliers later.
➡️Buffett looks for net receivables/sales that are lower than competitors
Long-term debt
Debt in itself is not an issue. Strong companies usually have a low debt level. But even if they have debt, look at the earnings power compared to the debt.
➡️Buffett looks for a long-term debt-to-earnings power ratio below 4 (if profits are cash, they can pay back debt in 4 years)
Debt to equity
➡️Is debt-to-equity consistently low, preferably below 80%?
Retained earnings
This is one number that gives you information about the history of the company. How much earnings have been retained within the company in the past?
➡️Buffett looks for companies with a history of increasing retained earnings
Treasury shares
When a company buys back shares, it registers them as treasury shares. This reduced the number of shares outstanding of the company.
➡️Buffett looks for companies with increasing treasury shares.
Return on Equity
Has Return on Equity been stable or grown over the past decade? ROE is a measure of efficiency, although it might not be the best measure:
ROE can be a trap, as debt can inflate ROE. You might want to swap this for ROIC instead.
Cash Flow Statement
Profits are an opinion, cash is a fact
Alfred Rappaport
CAPEX
Capital investment is needed to maintain and grow a business in the future. But there are big differences in industries.
➡️Because Buffett is looking for a capital-light business, he wants CAPEX/Net Income to be below 25%.
Buybacks
We already covered this through the balance sheet, but the cash flow statement will also show the repurchase amount of shares (if any).
The 10-step checklist is based on the balance sheet and cash flow statement
Now let’s make a prompt out of this.
The prompt
Here’s an image of running this prompt on UnitedHealth Group (UNH) in ChatGPT. You can use it in 2 ways:
Look for red flags: This allows you to screen through companies fast.
Look for all greens: Maybe certain companies will come up as mostly green. It might be interesting to dive deeper into these
The body of the prompt is the framework we just explained.
The output is designed as a table, so one snapshot gives you an idea of how Buffett-like this company is.
You can copy/paste the prompt at the end of this article. You only need to change the company name. As always, make it your own, edit it.
You’ll see other articles like this appearing in the future. Let us know what you think:
Until soon, with more prompts and workflows!
Kevin
The prompt:
# Your Role
You are an experienced equity analyst who has read everything Warren Buffett has ever written. For all intents and purposes, you are Buffett GPT. You search for the truth, weeding out the subjective from the objective. You use the maximum amount of information available to you in your research. I need your help in analyzing and understanding a company.
# The data
Fetch and integrate publicly available real-time data
Pull recent, credible, and relevant financial and strategic data about the company and its competitors from online sources (e.g. annual reports, earnings calls, news, financial platforms, patent databases, customer reviews, etc.).
# Your Task
The company we are researching today is called {Company_Name} which is publicly traded on the London Stock Exchange with the ticker Wise.
Can you go through the publicly available filings and break down the balance sheet, income statement, and cash flow statement as Buffett would do it?
Here’s some additional context to provide structure in analyzing these 3 statements.
For the balance sheet:
Buffett wants companies drowning in cash. So if cash and cash equivalents has been increasing over the last years, it’s a good sign the company is doing something right.
➡️Look for a steady rise in cash and cash equivalents
### Inventory
In the case of a company that holds inventory, a steady increase in inventory over the last years signals the company is selling more and more products. This is a good sign.
### Net receivables
The best companies have a cash conversion cycle that is negative. In other words they get paid in cash first and only have to pay their own suppliers later.
We dove deep into the cash conversion cycle in a previous article.
➡️Buffett looks for net receivables/sales that are lower than competitors '
### Long-term debt
Debt on itself is not an issue. Strong companies usually have a low debt level. But even if they have debt, look at the earnings power compared to the debt.
➡️Buffett looks for a long-term debt-to-earnings power ratio below 4 (if profits are cash, they can pay back debt in 4 years)
### Debt to equity
➡️Is debt to equity consistently low, preferably below 80%?
### Retained earnings
This is one number that gives you information about the history of the company. How much earnings have been retained within the company in the past?
➡️Buffett looks for companies with a history of increasing retained earnings
### Treasury shares
When a company buys back shares, it is registered as treasury shares. This reduced the amount of shares outstanding of the company.
➡️Buffett looks for companies with increasing treasury shares.
### Return on Equity
Has Return on Equity been stable or grown over the past decade? ROE is a measure of efficiency, although it might not be the best measure:
ROE can be a trap, it might be better to look at ROIC.
For the income statement:
Gross Margins
➡️The gross margin (gross profit/revenue) needs to be high, ideally above 40%.
It could signal pricing power. It provides a cushion for the company when things go sour.
Next, he takes a look at how different operating expenses compare to gross profits between different companies.
He’s looking for companies that are drowning in cash, so the cost structure matters.
SG&A
Selling, General & Admin costs can eat away at profits.
➡️He looks for SG&A/gross profits lower than 30%. The lower the better.
R&D
Phil Fisher loved R&D because it is needed to fuel future growth. But a company that can sustain its future growth with low R&D spending might have something special.
High R&D costs could mean the advantage is temporary, that it is not inevitable, or structural.
➡️Look for R&D/Gross profits < 10%
Depreciation
Depreciation is a cost. You already know he despises EBITDA.
Even worse, the cash was already paid in full at the start of the investment!
Low depreciation costs could mean that it's a capital-light business. And capital-light business might be more profitable.
➡️Look for Depreciation cost/gross profits < 10%
You don’t need the balance sheet. The Income statement can give you a signal of financial health.
High MOAT companies can have debt, but their earnings power is so strong that if they need to, they can pay it back pretty quickly.
➡️Look for Net interest/Operating profit < 10%
Net Income and EPS
Buffett wants a highly profitable company. He wants the company to have a history of rising profitability, not only on the amount but on the of earnings per share.
➡️Look for rising income and EPS
Income Before Tax and Normalization
There are no criteria for this, but I wanted to mention 2 important things:
- All investments are relative. Buffett likes the income before tax because if he divides it by the market cap he gets an equity yield. This allows for easy comparison to a bond yield or another company.
- When he talks about earnings, he means normalized earnings. We need to remove one-off profits or losses or even look at the cyclical nature of the business. Don’t just look at the P/E on a screen.
For the cash flow statement:
Profits are an opinion, cash is a fact
Alfred Rappaport
### CAPEX
Capital investment is needed to maintain and grow a business in the future. But here are big differences in industries.
➡️Because Buffett is looking for a capital-light business, he wants CAPEX/Net Income to be below 25%.
### Buybacks
We already covered this through the balance sheet, but the cash flow statement will also show the repurchase amount of shares (if any).
# Reasoning Instructions
“Base reasoning only on evidence provided or well-known industry facts; clearly state any assumptions.” Go through the different financial data 1 by 1.
# The Output Format
The output should be structured into 3 parts.
Buffett's balance sheet analysis
Buffett’s income statement analysis
Buffett’s cash flow statement analysis
Conclusion: Based on the above analysis, come up with a conclusion. Is this company high-quality based on the analysis of the financial statement?
Provide a checklist for all criteria. Present that checklist in a table. Use a traffic light (with actual colors presented by dots in green, yellow, and red) representation to visualize the value of each criterion. Clearly split the table into 3 parts: Balance Sheet, Income Statement, and Cash Flow Statement.
The constraint angle is actualy pretty clever here. Most people just throw financial data at ChatGPT and expect magic, but giving it specific threshholds (like that 40% gross margin filter) turns it into more of a screening tool than a black box. I've been testing similar framworks on other healthcare names and noticed the R&D metric can be tricky becuase some managed care businesses show artificially low R&D spend not because they have moats, but because they're mostly service oriented. Worth keeping an eye on whether the LLM is catching context like that or just flagging greens and reds mechanically.