Brian Feroldi

Long Term Mindset

We teach stock pickers how to analyze businesses so they can manage their own money. Join 100,000+ investors who read our Wednesday newsletter. It's read by people who work at Andreessen Horowitz, Google, Microsoft, Morningstar, and more.

Founder

The Motley Fool

Helping the world invest. Better.

Covering the healthcare & technology industries for Fool.com.

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Insulet Corporation

Growing sales, servicing existing accounts and expanding business relationships

Territory Manager

Creating and launching the website, creating and launching the trade show booth, controlling the labeling and documentation that supports the product

Product Manager

I demystify the stock market | Author, Speaker, Creator | 90,000+ investors read my free newsletter (see link)

Are you an investor?

Imagine if you could...

🔎 Find great businesses
🎯 Analyze them like Warren Buffett
⚖️ Value them to know if they are a "buy" or "sell"

If you could do this, then you could:

✅ Build a rock-solid portfolio
✅ Skyrocket your net worth
✅ Invest with confidence

The only problem: learning how to invest well can be incredibly confusing!

I should know. I've investing in individual stocks for 20+ years. 

I've made just about every investing mistake you can make.

Here are *some* of the challenges I faced along the way (can you relate?).

❌ Learning how to analyze financial statements
❌ Figuring out if a business was good, great, or gruesome
❌ Valuing a business to know if it is a buy or a sell

If you're facing these same challenges, I can help.

I teach investors just like you how to analyze businesses so you can invest with confidence.

I can say this with conviction because this is exactly what I've done for myself over the last 20 years.

I've built a market-beating portfolio from scratch, which has skyrocketed my net worth.

Now, I help other investors how to do the same thing by showing them how to analyze businesses like a pro.

Here's how I can help you:

🔎 ACCOUNTING: Find, read, and analyze a company's financial statements, fast
🧮 QUALITY: Use a simple checklist to tell if a business is good, great, or gruesome 
⚖️ VALUATION: Calculate the price of a business to know if it is a buy, sell, or hold
🧑‍🤝‍🧑 COMMUNITY: Connect with other investors to share ideas, lessons, and stories

Whether you’re just starting out on your investing journey or want to bring your skills to a new level, I’m here to help. 

Begin your investing journey today: longtermmindset.co

To get started, download my FREE accounting infographic ebook:
🔗 longtermmindset.co/fssebook/

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FREE RESOURCES:

🎥 Youtube Videos: youtube.com/c/brianferoldiyt
📖 Accounting eBook: longtermmindset.co/fssebook/
✅ Investing Checklist: ngtermmindset.co/checklist/
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Questions? Comments?

Email: brian@longtermmindset.co

Warren Buffett’s "Rules of Thumb":
📚 FREE investing ebook: https://lnkd.in/ep2N32B3

1: Gross Margin
🧮 Equation: Gross Profit / Revenue
👍 Rule of Thumb: 40% or higher
🤔 Buffett's Logic: A consistently high gross margin signals that the company isn’t competing exclusively on price.

2: SG&A Margin
🧮 Equation: SG&A Expense / Gross Profit
👍 Rule of Thumb: 30% or lower
🤔 Buffett's Logic: Wide-moat companies don’t need to spend a lot on overhead to operate & get consumers to buy.

3: R&D Margin
🧮 Equation: R&D Expense / Gross Profit
👍 Rule of Thumb: 30% or lower
🤔 Buffett's Logic: Buffett doesn't want to own companies that need to constantly invent the next great product to do well.

4: Depreciation Margin
🧮 Equation: Depreciation / Gross Profit
👍 Rule of Thumb: 10% or lower
🤔 Buffett's Logic: Buffett doesn't like businesses that constantly need to invest in depreciating assets to maintain their competitive advantage.

5: Interest Expense Margin
🧮 Equation: Interest Expense / Operating Income
👍 Rule of Thumb: 15% or lower
🤔 Buffett's Logic: Great businesses have such wonderful economics that they don’t need debt to finance themselves.

6: Income Tax Expenses
🧮 Equation: Taxes Paid / Pre-Tax Income
👍 Rule of Thumb: Current Corporate Tax Rate
🤔 Buffett's Logic: Great businesses make so much money that they are consistently forced to pay their full share of taxes.

7: Net Margin (Profit Margin)
🧮 Equation: Net Income / Sales
👍 Rule of Thumb: 20% or higher
🤔 Buffett's Logic: Companies that consistently convert 20% of their revenue into net income are more likely to have a durable competitive advantage.

8: Earnings Per Share Growth
🧮 Equation: Year 2 EPS / Year 1 EPS
👍 Rule of Thumb: Positive & Growing
🤔 Buffett's Logic: Great companies consistently generate profits and increase them every year regardless of the operating environment.

3 Important notes:

1⃣ These “rules of thumb” are only useful when a company is mature and fully optimized for profits.

2⃣ CONSISTENCY is key. The real test is if a company generates good numbers over multiple years & various economic cycles.

3⃣ There are PLENTY of exceptions & nuances to these rules. Many of Buffett’s largest holdings do not pass every rule of thumb. That’s because investing & accounting have TONS of nuances.

What "rules of thumb" do you use to make investing decisions?

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I teach investors how to analyze businesses so they can invest with confidence. Follow me for posts about accounting & investing. Grab my free investing eBook (See Link) ⬇️

𝐕𝐚𝐥𝐮𝐚𝐭𝐢𝐨𝐧 𝐂𝐡𝐞𝐚𝐭 𝐒𝐡𝐞𝐞t
📚 FREE investing ebook: https://lnkd.in/eT3Xrjt8

Learn the essential methods:
• DCF
• Comparable Company Analysis 
• Precedent Transaction Analysis

Plus get clarity on: 
• How to calculate discount rates
• Terminal values
• Sensitivity analysis. 

Source: Tushar Kore 

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Valuation Cheat Sheet by Turshare Kore

Join 80,000+ other long-term thinkers. Each Wednesday, I send five pieces of timeless content that encourage you to think long-term.

Co-Founder, Chief Content Officer

Finance Analyst

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Brian Stoffel

Margin vs. Markup
Knowing the difference can improve profits!

To calculate margin and markup, you need three numbers:

1: Revenue: Income earned from sales after discounts & rebates
2: Cost of Goods Sold (COGS): The cost to create the product/service
3: Gross Profit: Revenue - COGS

🔹 Margin is based on the selling price.

It shows the percentage of the selling price that becomes gross profit.

Formula: (Gross Profit / Reveue) x 100

🔹 Markup is calculated based on the cost.

It shows how much higher the selling price is than the item cost.

Formula: (Gross Profit / Cost of Goods Sold) x 100

Example!

You own a bike shop. You sell a bike for $200 that costs you $150.

 Margin: ($50 / $200) X 100 = 25%
Markup: ($50 / $150) x 100 = 33% 

Understanding the difference is crucial for pricing strategies, financial analysis, and overall business acumen.

More details are in the graphic below!

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I demystify the stock market | Investor, Financial Educator, Creator | 100,000+ investors read my free newsletter (see link)

How the Financial Statements connect 🔄

 Understanding how the three financial statements link is crucial to gaining a comprehensive view of a company's financial health.

📃 INCOME STATEMENT
Shows a company's revenue, expenses, and net income over a period of time (month, quarter, year).

📃 BALANCE SHEET
Shows a snapshot of a company's assets, liabilities, and equity at a point in time (Sept 30th, 2023).

📃 CASH FLOW STATEMENT 
Shows a company's cash movements over a period of time (month, quarter, year)

NET INCOME
→The bottom line of the Income Statement becomes the top line of the Cash Flow Statement.
→Net income is added to retained earnings on the Balance Sheet.

ENDING CASH BALANCE
→The bottom line of the Cash Flow Statement becomes the top line of the Balance Sheet

What questions do you have about the financial statements? Let me know below!

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How to analyze a Cash Flow Statement - FAST

Look for these 9 green flags:

1️⃣ Net Income Positive & Growing

Formula: Year 2 Net Income vs. Year 1 Net Income

What: Strong companies consistently grow their net income, even during recessions. 

2️⃣ Stock-Based Compensation < 10% of Net Income

Formula: Stock-Based Compensation / Net Income

What: Stock-based compensation can dilute shareholders when too much is issued. A rule of thumb is for this number to be under 10% of profits.

3️⃣ Operating Cash Flow > Net Income

Formula: Operating Cash Flow vs. Net Income

What: Operating Cash Flow adds back non-cash charges like Depreciation, Amortization, and Stock-Based Compensation. It should always be larger than Net Income. 

4️⃣ Free Cash Flow > Net Income

Formula: (Operating Cash Flow - Capital Expenditures) vs. Net Income

What: Free Cash Flow represents how much cash the business generated during the period. It's a great sign when Free Cash Flow is larger than Net Income. 

5️⃣ Capital Expenditures < 25% of Net Income

Formula: Capital Expenditures / Net Income

What: Great companies do not need to reinvest a lot of profit back into the business to grow. It's a great sign when Capital Expenditures are less than 25% of Net Income.

6️⃣ Debt Reduction

Formula: Debt issuance is negative 

What: Great companies do not need to rely on debt markets to fund themselves, especially in a high-interest-rate environment. It's a great sign when a company is reducing its debt load.

7️⃣ Stock Repurchase

Formula: Stock Issuance is a negative

What: Great companies return capital to shareholders. It's a positive sign if a company is buying back stock.

8️⃣ Dividends

Formula: Dividends paid is a negative

What: Great companies consistently pay a cash dividend to shareholders. It's a positive sign if a company returns capital to shareholders via a dividend.

9️⃣ Cash Balance Increases

Formula: Changes In Cash Balance During Period

What: It's a wonderful sign when a company pays for capital expenditures, reduces debt, buys back stock, pays a dividend, and its cash balance still increases.

What Green Flags did I miss? Let me know below!

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Financial Statements Green Flags 

INCOME STATEMENT 📜 
→Accelerating Revenue Growth
→Gross Margin Expansion
→Operating Expenses Growing Slower Than Revenue
→Operating Margin Expansion
→Interest Income Exceeds Interest Expense
→Pre-Tax Margin Expansion
→Income Tax Rate Near 21%
→Net Income Grows Faster Than Revenue
→Shares Outstanding Declines
→Earnings Per Share Consistently Grows

BALANCE SHEET 📜 
→More Cash Than Debt
→No Accounts Receivables
→No Inventory
→Goodwill Less Than 10% of Total Assets
→Current Liabilities Less Than Cash
→No Short-Term or Long Term Debt
→Deferred Revenue
→No Preferred Stock
→Retained Earnings Positive & Growing
→Treasury Stock

CASH FLOW STATEMENT 📜 
→Net Income Positive & Growing
→Stock-Based Compensation Less Than 10% of Net Income
→Operating Cash Flow Higher Than Net Income
→Capital Expenditures Less Than 10% of Net Income
→Free Cash Flow Higher Than Net Income
→Stock Repurchase
→Dividends Paid
→Cash Balance Increase

What "green flags" do you look for in financial statements? Let me know below!

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Balance Sheet 101

What is a balance sheet?

It's what a company owns and owes at a point in time.

A balance sheet is a snapshot of a company in that moment of time.

ASSETS = LIABILITIES + EQUITY

 What a company owns (assets) less what it owes (liabilities) is equal to its net worth (equity)

ASSETS

CURRENT ASSETS 
- Cash, inventory, accounts receivable, short-term investments, and pre-paid expenses.

FIXED ASSETS 
- Long-term assets such as property and equipment.

OTHER ASSETS 
- Intangibles such as patents or trademarks 

LIABILITIES AND OWNER'S EQUITYCURRENT LIABILITIES 
- Accounts payable, accrued wages, taxes, and interest due within a year

LONG-TERM LIABILITIES 
- Mortgages, band loans, and anything due in more than a year

OWNER'S EQUITY 

The money you have left over after selling everything in the company and paying off liabilities.

Why important? 
- Determine financial health 
- Help obtain loans 
- Value the company 
- Monitor changes over time

The real value of a balance sheet is in its consistent use and analysis. With it, you can transform expectations into real goals, set milestones and limits, and measure both short and long-term performance.

Enjoy this summary?

Income Statement 101
What is an income statement?

It's a financial statement that shows a company's revenues and expenses over a specific period, typically a fiscal quarter or year.

An income statement provides a snapshot of a company's financial performance during that period.

REVENUES - EXPENSES = NET INCOME

The income generated (revenues) minus the costs incurred (expenses) equals the company's net income or profit.

REVENUES

OPERATING REVENUES
Sales from the company's core business operations, such as product sales or service fees.

NON-OPERATING REVENUES
Income from sources outside the core business, like interest income or investment gains.

EXPENSES

OPERATING EXPENSES
Costs directly associated with running the business, including wages, rent, utilities, and raw materials.

NON-OPERATING EXPENSES
Costs unrelated to the core business, like interest payments on loans.

TAXES
Income taxes paid by the company.

NET INCOME
The remaining profit or loss after subtracting all expenses from revenues.

Why is it important?
- Measures financial performance.
- Provides insights into profitability.
- Helps with decision-making and budgeting.
- Demonstrates the ability to generate profit.

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