Berkshire Hathaway Financial Analysis

Berkshire Hathaway

Berkshire Hathaway happens to be one of the best known companies across the world. This is more so the case given that it is led by Warren Buffet, a person who has gained acclaim for his investing prowess. The company is essentially a holding company that mostly invests in other companies via acquisition of their stock. Following an assessment of the most recent SEC filing of the company (i.e. for the financial year ended 31st Dec, 2021), as well as the previous financial year’s financial statements, the following ratios were computed:

Category

Formula

Liquidity

Current Ratio

Current Assets/Current Liabilities

$148,896M/$46,072M

$141,832/$45,568M

Asset Management

Total Asset Turnover Ratio

Total Revenue/Total Assets

$276,094M/$958,784M

$245,510M/$873,729M

Financial Leverage

Debt-to-Equity

Total Debt/Total Equity

$114,262M/$514,930M

$116,895M/$451,336M

Profitability

Return on Equity

Net Income/Shareholders Equity

$90,807M/$514,930M

$43,253M/$451,336M

Market Value

Earnings Per Share

Net Income/Average Outstanding Common Shares

$90,807M/2.256B

$43,253M/2.393B

Analysis

From the onset, it would be prudent to note that Berkshire Hathaway faces some of the very same challenges being faced by most other businesses in the U.S. This is more so the case in relation to the possibility of a downturn in economic activity as a consequence of the COVID-19 pandemic. A downturn in economic activity would essentially mean that Americans have less disposable income – and thus less to spend. This would have a negative impact on the profitability of many of the enterprises in which Berkshire Hathaway has a stake, i.e. the Coca-Cola Company. The company also faces an uncertain future given the ages of Warren Buffet (91) who serves as CEO and Chairman of the Company’s Board of Directors, and Charlie Munger (98) who serves as the company’s Board of Directors Vice Chairman. There is no clear succession plan in place. However, it is important to note that there are plenty of opportunities for the company to explore in emerging markets such as Asia-Pacific region. This would be in keeping with the company’s overall objective of “achieving long-term sustainable growth by developing and strengthening competitive advantages” (Berkshire Hathaway, 2021, p. K-25).

With regard to the company’s stock price, available data indicates that over the last 6 months, the company’s stock has been on an upward trend. For instance, on the 18th of October 2021, the company’s stock was trading at $282.59. However, as at close of business on 14th April, 2022, the company’s stock was trading at $344.33. This could be attributed to the market’s response to a series of large investments the company has made in the recent past. The said major investments are inclusive of, but they are not limited to; Occidental Petroleum Corp, Alleghany Corp, and HP (Stampel, 2022). For instance, as Stampel (2022) further indicates, the HP recent stock acquisition alone resulted in a 10% spike in Berkshire Hathaway’s stock.

When it comes to overall financial health of the company, it should be noted that the liquidity ratio selected indicates that Berkshire would have no problem meeting its short-term obligations. This is more so the case given that its current ratio happens to be more than 1. Thus, Berkshire could be granted a clean bill of health in as far as its short-term solvency is concerned. Further, in as far as the company’s long-term solvency is concerned, the low debt-to-equity ratio indicates that Berkshire is not dangerously leveraged. Thus, the company has not been particularly aggressive in the deployment of debt in efforts to advance its growth agenda. The company’s total asset turnover ratio indicates that the firm’s asset utilization has gotten better over the last two financial years. The seemingly low ratio in this case is typical for a company like Berkshire that has a large asset base. In as far as profitability is concerned, the growth in return on equity indicates that Berkshire’s shareholders are better off than they were one year ago. If this trend were to continue, it would mean that the company is a viable investment alternative due to its efficiency in profit generation. This assertion is further supported by the 55% increase in EPS over the two financial years under consideration.