When analyzing a company, does Warren Buffett look at the balance sheet, income statement, or cash flow statement first?

Answer to the Question

Priority Financial Statement

When analyzing a company, Warren Buffett prioritizes reviewing the balance sheet.

Reasoning

• Buffett’s Investment Philosophy: According to his shareholder letters and interviews, Buffett always begins with the balance sheet to assess a company’s financial health, including debt levels, asset quality, and liquidity. This helps identify excessive leverage risks or hidden financial vulnerabilities.
• Subsequent Steps: After examining the balance sheet, he moves to the income statement to evaluate profitability and cross-references the cash flow statement to verify cash generation. However, the balance sheet serves as the starting point, as it reflects the company’s "foundation."
• Value Investing Perspective: Buffett emphasizes a "margin of safety." The balance sheet quickly reveals whether a company has a solid financial base, avoiding investments in overleveraged or asset-inflated businesses. This aligns with his value investing principle of prioritizing capital preservation.

References

• Berkshire Hathaway Shareholder Letters (e.g., 1995): He explicitly stated, "When reading financial statements, I always start with the balance sheet."
• Related Investment Concepts: While the cash flow statement is crucial (for calculating "owner earnings"), it is not prioritized. The income statement analyzes profits but requires validation against the balance sheet for authenticity.

This prioritization helps investors avoid common pitfalls in company analysis and is essential for value investing practices.