Long Term Mindset

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

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Finance Analyst

KIPP DC

Teacher, Chair

My weekly newsletter: Long-Term Mindset 

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5 Types of Moat

If you invest, you MUST be able to identify a moat.

Here are 5 powerful moat sources:

🏰 INTANGIBLE ASSETS:

Example: Brand, Patents, Copyrights

Wide: Coca-Cola
Narrow: Dr. Pepper Snapple
None: United Airlines

🏰 SWITCHING COSTS:

It would be expensive in terms of cost, time, or training, to switch to an alternative provider.

Wide: Oracle
Narrow: Salesforce
None: Macy's

🏰 NETWORK EFFECT:

A network becomes more powerful as more users join.

Wide: CME Group
Narrow: NYSE Euronext
None: ADM

🏰 COST ADVANTAGE:

A company can produce a product or service at a lower internal cost than competitors.

Wide: UPS
Narrow: FedEx
None: Alcoa

🏰 EFFICIENT SCALE:

A company's buying power or market position allows it to dominate its category.

Wide: Kinder Morgan
Narrow: Southern Company
None: Paris Aeroport

Which is your favorite moat?

All credit to Morningstar for the examples

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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Brian Stoffel

INCOME STATEMENT 📄 VS. CASH FLOW STATEMENT 📄

If you're in business, you MUST understand Financial Statements.

This cheat sheet can help you master the fundamentals.

📄 INCOME STATEMENT 📄

👉 PURPOSE: Track Income & Expenses

It shows a company's profitability at multiple levels when using ACCRUAL ACCOUNTING.

⏩ STARTS WITH: Revenue

Main sections:
💰 REVENUE: Total Sales
➖ COST OF GOODS SOLD: The cost to deliver the product or service
💰 GROSS PROFIT: Revenue - Cost of Goods Sold
➖ OPERATING EXPENSES: All Overhead Costs
💰 OPERATING INCOME: Gross Profit - Operating Expenses
➖ OTHER INCOME: Money earned that is not core to the business
💰 PRE-TAX INCOME: Operating Income - Other Income
➖ INCOME TAX: Taxes paid to Governments
💰 NET INCOME: Pre-Tax Income - Income Tax
🔢 SHARES OUTSTANDING: The total number of shares a company has
➗ EARNINGS PER SHARE: Net Income / Shares Outstanding

🔀 SIMILAR TO: Your Monthly Budget

⏰ TIME: Period of Time

🔢 ACCOUNTING: Accrual


📄 𝐒𝐓𝐀𝐓𝐄𝐌𝐄𝐍𝐓 𝐎𝐅 𝐂𝐀𝐒𝐇 𝐅𝐋𝐎𝐖𝐒 📄

👉 PURPOSE: Track Cash Movements

It shows a company's profitability at multiple levels when using CASH ACCOUNTING.

⏩ STARTS WITH: Net Income (also called Profits or Earnings)

3 Main sections:
💰 CASH FROM OPERATING ACTIVITIES
All of the cash flows from activities related to operating the business
💰 CASH FROM INVESTING ACTIVITIES
The cash movements from long-term assets
💰 CASH FROM FINANCING ACTIVITIES
The cash from all equity investments and debt from the company

🔀 SIMILAR TO: Your Checking Account

⏰ TIME: Period of Time

🔢 ACCOUNTING: Cash

Which financial statement do you like better? Let me know in the comments section below!

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Michael Mauboussin is an incredible investor.

Here's his checklist for measuring if a company has a moat.

Moat checklist questions:

1: OVERVIEW 🌆
▶ In what stage of the competitive life cycle is the company?
▶ Is the company currently earning a return above its cost of capital?
▶ Are returns on invested capital increasing, decreasing, or stable? Why?
▶ What is the trend in the company's investment spending, including mergers and acquisitions?

2: LAY OF THE LAND 🏝
▶ What is each player's level of profitability?
▶ What have the historical trends in market share been?
▶ How stable is the industry?
▶ How stable is market share?
▶ What do pricing trends look like?

3: THE FIRST 3 OF THE FIVE FORCES 5️⃣
▶ How much leverage do suppliers have?
▶ Are there substitute products available?
▶ Are there switching costs?
▶ How much leverage do buyers have?
▶ How informed are the buyers?

4: BARRIERS TO ENTRY 🚪
▶ What are the rates of entry and exit in the industry?
▶ What is the reputation of incumbents?
▶ How specific are the assets?
▶ What is the minimum efficient production scale?
▶Does the industry have excess capacity?
▶ Is there a way to differentiate the product?
▶ What is the anticipated payoff for a new entrant?
▶ Do incumbents have pre-commitment contracts?
▶ Do incumbents have costly licenses or patents?
▶ Are there benefits from the learning curve?

5: RIVALRY ⚔
▶ Is there pricing coordination?
▶ What is the industry concentration?
▶ What is the size distribution of firms?

6: DISRUPTION & DISINTEGRATION 🤺
▶ Is the industry vulnerable to disruptive innovation?
▶ Do new innovations foster product improvements?
▶ Is the innovation progressing faster than the market's needs?

7: FIRM SPECIFIC 🏛
▶ Are there economies of scale?
▶ What does the firm's distribution scale look like?
▶ Are assets and revenue clustered geographically?
▶ Are there purchasing advantages with size?
▶ Are there economies of scope?
▶ Are there diverse research profiles?
▶ Are there consumer advantages?
▶ Is there habit or horizontal differentiation?
▶ Do people prefer the product to competing products?

8: FIRM INTERACTION 🏭
▶ Does the industry include complementors?
▶ Is the value of the pie growing because of companies that are not competitors?

9: BRAND 🎖
▶ Do customers want to ‘hire’ the brand?
▶ Does the brand increase willingness to pay?
▶ Do customers have an emotional connection to the brand?
▶ Do customers trust the product because of the name?
▶ Does the brand imply social status?
▶ Can you reduce supplier operating costs with your name?

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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How to read a Cash Flow Statement:

The Cash Flow Statement shows a company's profitability at multiple levels over a period of time using CASH ACCOUNTING.

👉 PURPOSE: Track Cash Movement
🔀 SIMILAR TO: Your Checking Account
⏰ TIME: Period of Time
🔢 ACCOUNTING: Cash
⏩ STARTS WITH: Net Income

3 Main sections:
💰 CASH FROM OPERATING ACTIVITIES
All of the cash flows from activities related to operating the business
💰 CASH FROM INVESTING ACTIVITIES
The cash movements from long-term assets
💰 CASH FROM FINANCING ACTIVITIES
The cash from all equity investments and debt from the company

💰 CASH FROM OPERATING ACTIVITIES
Net Income (From the Income Statement)
➕ Non-Cash Changes
➕ / ➖ Changes in Working Capital
= Cash Flow from Operating Activities

💰 CASH FROM INVESTING ACTIVITIES
➖ Capital Expenditures
➖ Acquisitions
➕ Proceeds from the Sale of Investments
= Cash Flow from Investing Activities

💰 CASH FROM FINANCING ACTIVITIES
➕ / ➖ Borrowing / Repaying Debt
➕ / ➖ Issuing / Repurchasing Stocks
➖ Dividends Paid to Shareholders
= Cash Flow from Financing Activities

🔼 Total Change in Cash During Period
➕ Starting Cash Balance
➡ Ending Cash Balance (Sent to Balance Sheet)

💸 FREE CASH FLOW:
Cash Flow From Operation - Capital Expenditures = Free Cash Flow

Was anything confusing? Please let me know below. I'll be happy to explain further.

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I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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Financial Statements: A Beginner's Guide

If you're in business, you MUST understand the 3 Financial Statements.

Here's a quick overview:

📄 INCOME STATEMENT
Main sections:
💰 REVENUE: Total Sales
➖ COST OF GOODS SOLD: The cost to deliver the product or service
💰 GROSS PROFIT: Revenue - Cost of Goods Sold
➖ OPERATING EXPENSES: All Overhead Costs
💰 OPERATING INCOME: Gross Profit - Operating Expenses
➖ OTHER INCOME: Money earned that is not core to the business
💰 PRE-TAX INCOME: Operating Income - Other Income
➖ INCOME TAX: Taxes paid to Governments
💰 NET INCOME: Pre-Tax Income - Income Tax
🔢 SHARES OUTSTANDING: The total number of shares a company has
➗ EARNINGS PER SHARE: Net Income / Shares Outstanding

👉 PURPOSE: Track Income & Expenses
🔀 SIMILAR TO: Your Monthly Budget
⏰ TIME: Period of Time
🔢 ACCOUNTING: Accrual

📄 𝐁𝐀𝐋𝐀𝐍𝐂𝐄 𝐒𝐇𝐄𝐄𝐓
3 Main Sections:
💰 ASSETS: What the company Owns
🔴 LIABILITIES: What the company Owes to creditors
🔵 EQUITY: The net value of the owner's claim

➗ FORMULA: Assets = Liabilities + Shareholder's Equity
👉 PURPOSE: Track what a company OWNS (assets) and OWES (liabilities)
🔀 SIMILAR TO: Your Net Worth statement
⏰ TIME: Point in Time Snapshot
🔢 ACCOUNTING: Accrual

📄 𝐂𝐀𝐒𝐇 𝐅𝐋𝐎𝐖 STATEMENT
3 Main sections:
💰 CASH FROM OPERATING ACTIVITIES
All of the cash flows from activities related to operating the business
💰 CASH FROM INVESTING ACTIVITIES
The cash movements from long-term assets
💰 CASH FROM FINANCING ACTIVITIES
The cash from all equity investments and debt from the company

👉 PURPOSE: Track Cash Movements
🔀 SIMILAR TO: Your Checking Account
⏰ TIME: Period of Time
🔢 ACCOUNTING: Cash

Which questions do you have? Let me know in the comments section.

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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How the Income Statement + Balance Sheet link 🔄 :


📃 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).

🏭 TANGIBLE ASSETS
Assets you can physically (car, building).
Their value on the balance sheet is DEPRECIATED as operating expenses over the asset's useful life.

📜 INTANGIBLE ASSETS
Assets you can't physically touch (patent, copyright).
Their value on the balance sheet is AMORTIZED as operating expenses over the asset's useful life.

➖ Both depreciation and amortization costs are subtracted as operating expenses on the income statement.

❌ Financial assets that generate expenses (interest payments on debt) or losses (stock value falls) are subtracted as non-operating expenses on the income statement.

💰 Financial assets that generate income (cash generates interest) or profit (stock appreciates) are added as non-operating income on the income statement.

➕ Net income generated on the income statement is added to retained earnings on the equity side of the balance sheet.

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

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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BALANCE SHEET ⚖ VS. CASH FLOW STATEMENT 📄

If you're in business, you MUST understand Financial Statements.

Here's an overview of these two critical statements:

⚖ 𝐁𝐀𝐋𝐀𝐍𝐂𝐄 𝐒𝐇𝐄𝐄𝐓 ⚖

👉 PURPOSE: Track what a company OWNS (assets) and OWES (liabilities)

It shows a company's net worth at a point in time when using ACCRUAL accounting.

⏩ STARTS WITH: Cash Balance

3 Main Sections:
💰 ASSETS: What the company Owns
🔴 LIABILITIES: What the company Owes to creditors
🔵 EQUITY: The net value of the owner's claim

➗ FORMULA: Assets = Liabilities + Shareholder's Equity

🔀 SIMILAR TO: Your Net Worth statement

⏰ TIME: Point in Time Snapshot

🔢 ACCOUNTING: Accrual

📄 𝐒𝐓𝐀𝐓𝐄𝐌𝐄𝐍𝐓 𝐎𝐅 𝐂𝐀𝐒𝐇 𝐅𝐋𝐎𝐖𝐒 📄

👉 PURPOSE: Track Cash Movements

It shows a company's profitability at multiple levels when using CASH ACCOUNTING.

⏩ STARTS WITH: Net Income (also called Profits or Earnings)

3 Main sections:
💰 CASH FROM OPERATING ACTIVITIES
All of the cash flows from activities related to operating the business
💰 CASH FROM INVESTING ACTIVITIES
The cash movements from long-term assets
💰 CASH FROM FINANCING ACTIVITIES
The cash from all equity investments and debt from the company

🔀 SIMILAR TO: Your Checking Account

⏰ TIME: Period of Time

🔢 ACCOUNTING: Cash

Which financial statement do you like better? Let me know in the comments section below!

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

Check it out here (It's free) → https://lnkd.in/eKbRV7g6

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The best FREE investing tools:

📊 Charts:
Yardeni Research, Inc.
FinChat

🏫 Education:
Investopedia
Podcasts

📲 Conference Calls:
Quartr
Nasdaq

🔢 Financial Data:
FinChat

💸 Stock Screeners:
FinViz
FinChat

✍ Stock Articles:
Seeking Alpha
Morningstar
The Motley Fool

📱Social Media:
Twitter / X
Commonstock
YouTube

💰 IPO Data:
Nasdaq
Stock Analysis

🔢 Calculators:
DQYDJ
NerdWallet
Calculator

🐋 Portfolio Trackers:
FinChat
WhaleWisdom

🔎 Fund Manager Trackers:
Open Insider
Senate Stock Watcher

📰 Market News:
Yahoo Finance
CNBC

🖥 Investment Brokers:
Interactive Brokers
Fidelity Investments
Charles Schwab

What's your favorite FREE investing tool?

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

Check it out here (It's free) → https://lnkd.in/eKbRV7g6

If you found this post useful, please repost ♻️ to share with your audience.

How to calculate 7 common valuation ratios: 📈

1. Price-to-Sales ratio (P/S ratio) ➗

Market Capitalization divided by Sales

2. Price-to-gross profit ratio (P/GP ratio) ➗

Market Capitalization divided by Gross Profit.

3. Price to EBITDA ratio (P/EBITDA)➗

Market Capitalization divided by Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) 💰

4. Price to EBIT ratio (P/EBIT)➗

Market Capitalization divided by Earnings Before Interest, Taxes (EBIT) 💰

5. Price to EBT ratio (P/EBT)➗

Market Capitalization divided by Earnings Before Taxes (EBT) 💰

6. Price to Earnings ratio (P/E)➗

Market Capitalization divided by Earnings 💰

7. Price to Free Cash Flow ratio (P/FCF)➗

Market Capitalization divided by Free Cash Flow 💰

➡ Market capitalization refers to the total value of a company's outstanding shares of stock.

It is calculated by multiplying the current market price of one share by the total number of shares outstanding.

This metric indicates how much the market values the company's equity.

➡ Free cash flow (FCF) measures a company's cash generation capabilities.

It is calculated as operating cash flow minus capital expenditures (money spent on purchasing or maintaining property, plant, and equipment).

It represents the cash a company can generate after spending the money required to maintain or expand its asset base.

Note that these formulas are simply the most common ways to calculate each ratio, and there may be variations or additional factors to consider depending on the specific company or industry being analyzed. 🤔

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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7 Cash Flow Ratios

Earnings are an opinion. Cash is a fact.

Watch these cash flow ratios to judge how a company is REALLY performing:

1: Cash Ratio
🧮 Cash / Current Liabilities.
➡️ It shows the company's ability to pay off its short-term debts using only its cash reserves.

2: Operating Cash Flow Ratio:
🧮 Operating Cash Flow / Current Liabilities.
➡️ It shows the company's ability to pay off its current liabilities using its operating cash flow.

3: Free Cash Flow to Sales Ratio:
🧮 Free Cash Flow / Trailing Twelve Month Sales.
➡️ It shows how much cash a company generates from its revenue after deducting all capital expenditures.

4: Free Cash Flow to Sales Ratio:
🧮 Share Price / Operating Cash Flow Per Share.
➡️ It shows how much investors are willing to pay for each dollar of operating cash flow.

5: Cash Flow Return on Investment (CFROI):
🧮 Present Value of Cash Flow / Invested Capital.
➡️ It shows the return on investment generated by a company's cash flow.

6: Debt to Operating Cash Flow Ratio:
🧮 Total Debt / Operating Cash Flow.
➡️ It shows how many years it would take for a company to pay off its debt using its operating cash flow.

7: Cash Flow Margin:
🧮 Operating Cash Flow / Revenue.
➡️ It shows how much of each dollar of revenue is converted into cash flow.

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

Check it out here (It's free) → https://lnkd.in/eKbRV7g6

If you found this post useful, please repost ♻️ to share with your audience.

How to read a Balance Sheet:

The Balance Sheet shows a company's net worth at a point in time using ACCRUAL ACCOUNTING.

➗ FORMULA: Assets = Liabilities + Shareholder Equity
👉 PURPOSE: What a Company Owns & Owes
🔀 SIMILAR TO: Your Net Worth
⏰ TIME: Point in Time
🔢 ACCOUNTING: Accrual
⏩ STARTS WITH: Cash

3 Main Sections:
💰 ASSETS: What the company Owns
🔴 LIABILITIES: What the company Owes to creditors
🔵 EQUITY: The net value of the owner's claim

💰 ASSETS
➡ CURRENT ASSETS: Expected to be used in <1 year
- Cash
- Marketable Securities
- Accounts Receivable
- Inventory
- Other Current Assets
➡ LONG-TERM ASSETS: Expected to be last >1 year
- Long-Term Investments
- Fixed Assets
- Goodwill
- Other Long-Term Assets

🔴 LIABILITIES:
➡ CURRENT LIABILITIES: Expected to be paid in <1 year
- Payables & Accrued Expenses
- Short-Term Debt
- Other Current Liabilities
➡ LONG-TERM LIABILITIES: Expected to be paid in >1 year
- Long-Term Debt
- Other Long-Term Liabilities

🔵 EQUITY:
- Preferred Stock
- Common Stock & Additional Paid-In Capital
- Retained Earnings
- Treasury Stock

Was anything confusing? Please let me know below. I'll be happy to explain further.

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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5 Income Statement Key Metrics to Track ✅

If you invest, you MUST understand Financial Statements.

Here are the 5 most important metrics to check on the Income Statement.

1️⃣ SALES GROWTH
➗ FORMULA: Year 2 Sales / Year 1 Sales
👉 WHAT: Companies are either growing or dying — there isn’t a third direction. Great companies consistently grow their revenues by at least 5% per year.

2️⃣ GROSS MARGIN
➗ FORMULA: (Revenue - Cost of Goods Sold) / Revenue
👉 WHAT: A stable or rising Gross Margin is a sign that a company has negotiating power with suppliers and pricing power with customers.

3️⃣ OPERATING LEVERAGE
➗ FORMULA: Revenue Growth Rate vs Profit Growth Rate
👉 WHAT: "Operating Leverage" means profits can grow FASTER than revenues. A $1 increase in revenue leads to more than a $1 increase in profits. This happens when revenue grows faster than expenses.

4️⃣ DEBT COVERAGE
➗ FORMULA: Interest Expense vs Operating Income
👉 WHAT: Good companies can easily cover their interest expense. A rule of thumb is that this ratio should be under 25%.

4️⃣ DILUTION
➗ FORMULA: Year 2 Shares Outstanding / Year 1 Shares Outstanding
👉 WHAT: Companies that pay a lot of Stock-Based Compensation dilute shareholders by rapidly increasing their share count. This growth should be under 3% for fast-growing companies and under 1% for slow-growing companies.

🔴 IMPORTANT CAVEATS

1: Not all revenue growth is good for investors
2: There can be good reasons for Gross Margin to decline
3: Operating Leverage will diminish over time
4: Stock buybacks can mask the true dilution rate

Which income statement metrics do you watch? Let me know in the comments section below!

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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10 types of income-producing assets: 💰

1: Stocks/Equities 📈
⁉ WHAT: Stocks represent ownership in a business
💸 RETURN POTENTIAL: 6%-10%
✅ PROS: High historic returns, can produce income, easy to own.
❌ CONS: High volatility, valuations can change quickly

2. Bonds 📜
⁉ WHAT: Loans made from an investor to a borrower
💸 RETURN POTENTIAL: 3%-7%
✅ PROS: Low volatility, easy to own, good for rebalancing.
❌ CONS: Low returns, not great in a low-interest rate environment

3: Savings Accounts/CDs 🏦
⁉ WHAT: Cash held in a bank
💸 RETURN POTENTIAL: 2%-5%
✅ PROS: Safety of principle, less risky than bonds
❌ CONS: Low returns, not great in a low-interest rate environment

4: Real Estate Investment Trusts (REITs) 🏘
⁉ WHAT: A business that owns and manages properties and pays out the income to its owners
💸 RETURN POTENTIAL: 8%-12%
✅ PROS: Easy to buy/sell, high income
❌ CONS: Highly correlated with stocks, volatile

5: Master Limited Partnerships (MLPs) ⛽
⁉ WHAT: A business structure that combines the tax benefits of a partnership with the liquidity of publicly traded securities
💸 RETURN POTENTIAL: 5%-15%
✅ PROS: High yields, tax benefits, inflation hedge
❌ CONS: Complex tax reporting, volatile prices

6: Investment Real Estate 🏠
⁉ WHAT: When managed well, the renter pays off the mortgage while the owner earns long-term appreciation
💸 RETURN POTENTIAL: 5%-20%
✅ PROS: High return potential, can use leverage, a place to stay
❌ CONS: Time intensive, high capital needs, low diversification

7: Farmland 👨‍🌾
⁉ WHAT: An income-producing asset that has been a major source of wealth throughout history
💸 RETURN POTENTIAL: 7%-9%
✅ PROS: Low correlation to other assets, good inflation hedge
❌ CONS: Harder to buy, higher fees

8:. Small Businesses/Franchise 🏗
⁉ WHAT: Owning a part of a small business
💸 RETURN POTENTIAL: 0%-25%
✅ PROS: High return potential
❌ CONS: Risky, huge time commitment

9: Royalties 🗞
⁉ WHAT: Earn income from royalties on music, film, and trademarks
💸 RETURN POTENTIAL: 5%-20%
✅ PROS: Generate steady income, high return potential
❌ CONS: High fees, subject to changing consumer tastes

10:Products you create 💾
⁉ WHAT: Sell physical or digital goods to an audience
💸 RETURN POTENTIAL: 0%-10,000%
✅ PROS: Full ownership, huge return potential
❌ CONS: Hugely labor intensive, no guarantee of success

Which asset type do you like best?

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P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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Warren Buffett’s Balance Sheet 'Rules of Thumb':

⚖ BALANCE SHEET BASICS
➡ What: A company's "Net Worth" statement
🧮 Equation: Assets = Liabilities + Shareholders Equity
⏱ Time: It's a "Point in time" snapshot of what a company owns & owes
🔢 Accounting: Accrual Accounting

RULES OF THUMB:
1: Cash & Debt
🧮 Equation: Cash > Debt
👍 Rule: More cash than debt
🤔 Buffett's Logic: Great companies generate so much cash that they can easily fund their operations without much debt.

2: Adjusted Debt to Equity
🧮 Equation: Total Liabilities / (Shareholder Equity + Treasury Stock)
👍 Rule : < 0.80
🤔 Buffett's Logic: Great companies have MUCH more shareholder equity than liabilities. However, treasury stock (stock buybacks) can throw off this equation, so it must be added to the denominator.

3: Preferred Stock
👍 Rule: None
🤔 Buffett's Logic: Preferred stock can be an expensive way for a company to finance itself. Great companies don't need to issue preferred stock.

4: Retained Earnings
🧮 Equation: Year 1 / Year 2
👍 Rule: Consistent growth
🤔 Buffett's Logic: Great companies consistently grow their retained earnings yearly, including during recessions.

5: Treasury Stock
👍 Rule: Exists
🤔 Buffett's Logic: Great companies throw off so much cash that their management team can continuously repurchase their stock. This shows up as "treasury stock" on the balance sheet.

3 IMPORTANT NOTES!
1⃣ These “rules of thumb” are only helpful 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 & and 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 analyze a balance sheet?

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Warren Buffett LOVED Philip Fisher.

Fisher's book "Common Stock & Uncommon Profits" profoundly impacted Buffett's investing style.

Philip Fisher was one of the first great growth investors ever.

Here's his 13-question investing checklist that he used to find great stocks:

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1: Does the company have products or services with sufficient market potential to increase sales for at least several years?

2: Does management have the determination to continue to create new products or services that will open up new markets?

3: How effective are the company's research and development efforts?

4: Does the company have an above-average sales organization?

5: Does the company have a worthwhile profit margin?

6: What is the company doing to improve profit margins?

7: Does the company have outstanding labor and personnel relations?

8: Does the company have outstanding executive relations?

9: How good are the company's cost analysis and accounting controls?

10: Does the company have a short or long-term outlook profit outlook?

11: Does the company need to issue equity to finance its growth?

12: Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?

13: Does the company have a management of unquestionable integrity?

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I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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How to analyze a balance sheet in <2 minutes.

Study these 4 ratios:

⚖ 1: Quick Ratio

❓ Question: Can the company pay its bills?

➗ Equation: Cash + Equivalents + AR / Current Liabilities

🔢 Guide:
Fragile = <1.0
Robust = 1 to 1.5
Antifragile = <0.7

⚖ 2: Current Ratio

❓ Question: How well does the company manage its assets?

➗ Equation: Current Assets / Current Liabilities

🔢 Guide:
Fragile = <0.7
Robust = 1
Antifragile = >2.5

⚖ 3: Debt-to-Equity Ratio

❓ Question: How much leverage is the company using?

➗ Equation: Total Liabilities / Shareholder Equity

🔢 Guide:
Fragile = >2.0
Robust = ~1
Antifragile = <0.7

⚖ 4: Goodwill-to-Assets Ratio

❓ Question: Is the company growing organically?

➗ Equation: Goodwill / Total Assets

🔢 Guide:
Fragile = >50%
Robust = 10% - 50%
Antifragile = <10%

To be clear, this isn't all the balance sheet analysis you should do.

But, looking at these four ratios can get you 90% of the way there in less than 2 minutes.

Which questions do you have? Let me know in the comments section.

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I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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24 Traits of Great Managers

1: They don’t rely on external motivation
2: They see the world differently
3: They have founder-company fit
4: They provide freedom & autonomy
5: They occasionally rule with an iron fist
6: They are process oriented
7: Money does not drive them
8: They're chefs and not cooks
9: They can be polarizing
10: They are clear communicators
11: They're driven by contribution
12: They’re self aware
13: They cast a larger than life vision
14: They love simplicity
15: They think about the problem
16: Solving centric vs selling centric
17: They execute
18: They're doing their “life’s work”
19: They are customer #1
20: They’re not optimizers
21: They’re teachers
22: They hire strong generals
23: They're not profit maximizes
24: They are not afraid to look stupid

Few -- if any -- managers will match all of these traits perfectly.

Which CEOs come close?


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I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.

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12 Books recommended by Billionaires 📚

1: JEFF BEZOS
👨 Founder of Amazon
💰 Net Worth: $151 Billion
📖 Built To Last by Jim Collins

2: Warren Buffett
👨 CEO of Berkshire Hathaway
💰 Net Worth: $117 Billion
📖 The Intelligent Investor by Benjamin Graham

3: Mark Cuban
👨 Founder of Broadcast.com / Owner of Dallas Mavericks
💰 Net Worth: $7 Billion
📖 Rework by David Heinemeier

4: Jack Dorsey
👨 Founder of Twitter/Square
💰 Net Worth: $4 Billion
📖 The Art Spirit by Robert Henri

5: Bill Gates
👨 Founder of Microsoft
💰 Net Worth: $124 Billion
📖 Factfulness by Hans Rosling

6: Charlie Munger
👨 Vice Chairman of Berkshire Hathaway
💰 Net Worth: $3 Billion
📖 Influence by Robert Cialdini

7: Elon Musk
👨 Founder of Tesla / SpaceX
💰 Net Worth: $252 Billion
📖 Zero to One by Peter Thiel

8: Larry Page
👨 Co-Founder of Google
💰 Net Worth: $112 Billion
📖 The Hard Thing About Hard Things by Ben Horowitz

9: Sheryl Sandberg
👨 COO at Facebook
💰 Net Worth: $2 Billion
📖 Now, Discover Your Strengths by Marcus Buckingham

10: Peter Thiel
👨 Co-Founder of Paypal & Palantir
💰 Net Worth: $10 Billion
📖 Things Hidden Since the Foundation of the World by Rene Girard

11: Meg Whitman
👨 Former CEO of eBay & Hewlett-Packard
💰 Net Worth: $1 Billion
📖 Playing to Win by Roger Martin

12: Mark Zuckerberg
👨 Founder of Facebook
💰 Net Worth: $106 Billion
📖 The Idea Factory by Jon Gertner

How many of these have you read?

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How to read an Income Statement:

The Income Statement shows a company's profitability at multiple levels over a period of time using ACCRUAL ACCOUNTING.

👉 PURPOSE: Track Income & Expenses
🔀 SIMILAR TO: Your Monthly Budget
⏰ TIME: Period of Time
🔢 ACCOUNTING: Accrual
⏩ STARTS WITH: Revenue

Main sections:

💰 REVENUE: Total Sales
➖ COST OF GOODS SOLD: The cost to deliver the product or service
💰 GROSS PROFIT: Revenue - Cost of Goods Sold
➖ OPERATING EXPENSES: All Overhead Costs
💰 OPERATING INCOME: Gross Profit - Operating Expenses
➖ OTHER INCOME: Money earned that is not core to the business
💰 PRE-TAX INCOME: Operating Income - Other Income
➖ INCOME TAX: Taxes paid to Governments
💰 NET INCOME: Pre-Tax Income - Income Tax
🔢 SHARES OUTSTANDING: The total number of shares a company has
➗ EARNINGS PER SHARE: Net Income / Shares Outstanding

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50 Terms Every Investor Should Know

401(k):
An employer-sponsored account that provides workers with a tax-advantaged way to save for retirement.

Acquisition:
When a company buys the majority of another company’s stock in order to gain control of it.

Appreciation:
When the value of an asset increases over time.

Asset Allocation:
An investment strategy that aims to balance risk and reward by optimizing the portfolio’s mix of assets to best manage the investor’s needs.

Balance Sheet:
A statement of all the assets, liabilities, and equity that a company has at a point in time.

Bear Market:
When market prices fall by 20% or more.

Bonds:
Debt securities issued by corporations, governments, or other organizations and sold to investors.

Bull Market:
When market prices rise 20% or more.

Capital Gains:
When an asset is sold for a higher price than it was purchased.

Cash Flow Statement:
A financial statement detailing the cash movement through a company over a given time frame.

Compounding:
When the returns from an investment are reinvested to generate additional returns over and over again.

Correction:
When market prices fall 10% or more.

Convertible Notes:
A debt security that can be converted into a predefined amount of the issuer's shares.

Debt:
Money that is borrowed by one party from another. It needs to be repaid following predefined terms.

Dilution:
When a company creates new shares of stock, which has the effect of lowering the ownership percentage of the company’s existing stockholders.

Diversification:
A risk management investment strategy that mixes a variety of financial assets into a portfolio in order to minimize risk and maximize long-term returns.

Dividend:
A payment of a portion of a company’s profits to its shareholders.

Dividend Yield:
A financial ratio that estimates the cash return an investor can expect to earn from owning a stock or fund.

Dollar-Cost Averaging:
When an investor buys a fixed dollar amount of a financial asset at regular intervals, regardless of the price at the time of purchase.

Dow Jones Industrial Average:
One of the first stock market indexes that was created to help investors figure out whether the stock market is going up or down.

Earnings per Share:
The amount of profit shareholders have rights to per share owned.

Exchange Traded Fund:
A collection of financial assets that can be bought or sold on an exchange, just like a stock.

Expense Ratio:
A recurring fee that is charged to hold a fund.

Federal Reserve:
The central bank of the United States.

Free Cash Flow:
The total amount of cash a company generates from operations, minus capital expenditures.

Gross Margin:
The percentage of sales left after paying for the good or service being provided.

***

P.S. Want to master the basics of accounting (for free)?

I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English → https://lnkd.in/eKbRV7g6

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