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April 7 - April 21, 2020
In accounting and investing, income (or earnings) is often dividend into a per share basis which is called earnings per share (EPS). If the above example was showing earnings from a company with 100 shares, the EPS would be $3,500/100 = $35.
If we were going to find the EPS of the real income statement initially displayed, we would take the net income of $2,863 and divided it by the number of shares outstanding.
The answer is very simple! Equity or shareholders’ equity does not technically belong to the company; it simply belongs to the shareholders. In other words, the equity is a liability to the company because that is what the company owes to the shareholders.
Or, in other words, manage risk first (i.e., D/E), then consider the remaining choices based on yield (i.e., ROE).
The market rewards ambitious goals in the short run, but punishes them in the long run when it becomes clear that they become unrealistic.
Summing up: Vigilant leaders A debt-to-equity ratio of below 0.5 is preferred. Debt can disrupt even the best businesses because it limits flexibility and agility. To maintain flexibility, you should also make sure that you are getting more cash in than what is going out. This can be measured by the current ratio, which should be at least 1.5. Vigilant leaders also aim to make a decent return on equity (ROE). Above 8% consistently over a period of ten years is a strong indication of great management. Management is your agent. Their one and only task is to give you the most value for your
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A value investor is interested in persistent products that do not change due to technology.
I have assumed that the company has reinvested the retained earnings appropriately, therefore the profits continue to grow. This profit growth (or earnings growth) is reflected in a steady earnings per share (EPS) increase over time. This is extremely important: If the company retains earnings (reflected in book value growth), there should be a corresponding growth in future earnings (reflected in EPS growth).
But, Warren Buffett acknowledges that a stable and understandable company is the basis for minimizing risk and setting expectations for potential performance.
http://www.buffettsbooks.com/intelligent-investor/stocks/stock-stability.html
I urge you to never buy a company that does not have moat.
Determining a company’s moat is a qualitative process.
I would say that if you cannot see a company’s moat, there are two reasons: the first is because it is not there; the second is that you do not sufficiently understand the company.
Summing up: A company must be stable and understandable Finding a company that is stable and understandable is paramount because it reduces risk. In the end, we are trying to determine the value of a company (or stock). This can only be accomplished with minimal risk if we can reasonably assess and predict the direction of the company’s future earnings. By only investing in companies with a durable competitive advantage, you also reduce long-term risks. A moat can come in the form of intangibles, low-cost structures, and high switching costs (or stickiness).
Remember that the intrinsic value is the company’s real or fair value, regardless of what the stock price is.
This means that every ten dollars of price towards the stock should give you one dollar of earnings
Many investors have faced the same dilemma, and therefore they turn to a notion called “forward P/E” instead.
The idea behind this is that it uses the projected earnings instead of the past/present earnings.
He suggests that you buy stocks with a P/E ratio below 15—or, in other words, the return should at the very least be 6.67% (which is 1/15) annually.
if the P/B was 5, you would say that you’re paying $5.0 for every $1 of equity on the company’s books. As you can quickly see, a higher ratio is less exciting because
If the ratio is below 1, like .50, that means you’re paying 50 cents for every $1 of equity.
Warren Buffett’s mentor Benjamin Graham would try to find companies that had a P/B ratio of below 1.5 as a threshold for indicating value.
If you decide to buy a company with a high P/B, one of the best ways to minimize your exposure to risk is to ensure the company has a large moat—or durable competitive advantage.
On the opposite side of the spectrum, let’s talk about a low-risk investment. What should your minimal acceptable return be? Warren Buffett’s opinion is that no investment should yield a lower return than a federally issued bond. The reason he holds this opinion is because the Federal Reserve can simply print more money in order to fulfill its interest obligations; therefore, if a ten-year bond has a 3% return, the investor should never discount a ten-year investment decision lower than 3% annually.
The first calculation is called a discount cash flow calculation.
The second calculation is a variant of the discount cash flow calculation and it values stocks similarly to fixed income bonds.
A company organizes all their financial data into records called accounts. This organization is referred to as the “chart of accounts.”
Although accrual accounting might count funds that haven’t actually been paid, it provides a clearer and realistic picture of the company’s performance—especially for stock investors. A great way to account for any inconsistencies caused from accrual accounting is by thoroughly understanding the cash flow statement.
income from operations,
Net interest expenses are taken directly out of the pockets of the owners, so be very careful if the company pays too many interest expenses.
efficient when you include the daily costs of running the business. You, as an investor, might find it interesting to investigate why Pepsi’s secondary expenses are higher than Coke’s. Net income margin ratio Now we have arrived at the very bottom of the income statement. We still compare with the revenue, which is our starting point, but now we look at the big picture. The formula
Net Income Margin Ratio = Net Income (line 13) / Revenue (line 1)
This is a very important ratio for minimizing your risk.
Interest Coverage Ratio = Income from Operations (line 9) / Interest Expense (line 10)
Capitalization is how intangibles like patents and trademarks are entered into the balance sheet. Just as tangible assets get depreciated, intangible assets also lose value if it is deemed that they cannot generate income.
When intangible assets are depreciated, it’s called amortization.
This is a very important category and one that Warren Buff...
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As an investor, you should keep a close eye on the treasury stock account. The
As an investor, you should include treasury stock when you evaluate how the company has grown its equity per share (or book value).
As a rule of thumb, the liabilities-to-equity ratio should be below 0.8 to be considered low-risk.
In contrast to the operating cash flow, we want the cash flow from investing activities to be negative. Yes,
