Find blue chips throughout financial statements (2) income statement - business expense

Find blue chips throughout financial statements (2) income statement - business expense

Gross profit is not profit that a company can take all. We still have some expenses that have to be subtracted from. One of them is business expense. Business expense comprises of selling and administrative expenses, research expenses, and depreciation expenses. Let's see a picture below.

1. Selling and administrative expenses: Direct·indirect selling expenses, wages for executives and staff members, advertising expenses, traveling and transportation expenses, and legal expenses are included. Comparing to gross profit, blue chips have a low selling and administrative expenses ratio. And it would be really great if this low rate will be consistent not fluctuated. Warren Buffett recognizes a company as a good company when this ratio is less than 30%.

2. Research expenses: For develop new products. It is usually called R&D. I've thought that spending much money into R&D, but Warren Buffett doesn't like using much money for R&D. It's because that spending a lot amount of money for R&D means that a company has to develop new products always, and it also means that the company may lose the competitive advantage when the competitiveness of the new products is about to be gone.

3. Depreciation expenses: Decreasing value altogether with machines or building of a company get aged. If a company purchases an equipment with a lifespan of 10 years for 10 million dollars, it will not be treated as an expense for the year in which the equipment is purchased but will be depreciated at a cost of 1 million dollars per year over the life of the equipment.

4. Business profit: You can get it when you subtract the cost of goods sold and the above three operating expenses from sales.

We can get business profit rate with gross profit and sales (business profit rate = business profit/sales * 100), and the company above has 40% of gross profit rate.

To sum up, business expense comprises of selling and administrative expenses, research expenses, and depreciation expenses are always good as long as they are low. Having my own personality, however, I think some high level of R&D expenses are rather better.

Seeking a company with low R&D expenses will be right and more efficient way, if I want to find a company with a very solid competitive advantage like Warren Buffett does, but I would prefer to invest my money into companies developing useful technologies or products for human race even if those companies have high R&D expenses.

And I don't think my investing mindset would be disadvantageous for choosing a company that will grow well and long. As we can see Hanmi Pharm, Samsung, and other  tech stocks overseas, those promising companies are going to be great somehow, and we just need to develop an appreciation for selecting good companies.