🧶 Tags:: #Financial_Freedom #🌱 #Fleeting_Notes
Resources:: Finance MOC, Risk Management,How To Spend Money, How To Manage Money.
2021-10-09 - 15:47
1. Company performance
- To get an idea on company's performance, it's good to look at the companies (ROE) Return on Equity. This is also known as a stockholder's return on investment.
- Look at the ROE of a company to see if it has consistently performed well compared to other companies in the same industry.
- ROE = Net Income ÷ Shareholder's Equity.
- Looking at the long-term ROE of a company and analyzing it can give a good idea of its performance.
2. Company Debt
- The debt to equity ratio (D/E) is another key characteristic that's important to know the condition of a company.
- The ratio shows the proportion of equity and debt the company uses to finance its assets, the higher the ratio, the more debt. This means the company is financed more from debt.
- Higher levels of debt can result in a volatile earnings and large interest expenses. For a more stringent test, investors sometimes use only long-term debt instead of total liabilities.
3. Profit Margins
- A company's profitability depends on having a good profit margin and also the ability to keep increasing it.
- Profit margin = Net income ÷ Net Sales.
- Things to look at for good profit margins is to look back for at least 5 years of profit margins.
A high profit margin indicates the company is executing its business well.
An increasing profit margin means management has been extremely efficient and successful at controlling expenses.
4. Is The Company Public?
- A good rule of thumb to understand if the company is public or not is to see if they've been around for an at least a decade or not?
- As a result, most of the technology companies that have had their IPOs in the past decade wouldn't get on Buffet's radar.
- It's important to understand that many companies nowadays, especially tech companies, are priced based on speculation. The speculation being how many users it can acquire? What this technology can do in the future. Something like crypto and twitter, etc.
- Value investing requires identifying companies that have stood the test of time, but are currently undervalued.
- Never underestimate the value of historical performance. This demonstrates the company's ability (or inability) to increase shareholder value.
- Do remember that a stock's past performance does not guarantee future performance.
- A good way to determine if the company can repeat its past performance is to look at its financial statements. These are usually made public by the Securities and Exchange Commission if they are public companies. (The same can be said about Indian companies.)
5. Commodity Reliance
- This is point is important but does not apply to all the products. If a company whose products are indistinguishable from those of competitors, it's good to not invest in it.
- If the company's products are hard to replicate, it has a good advantage compared to its competitors. This is what buffet calls a company's economic moat or competitive advantage. The wider the moat, the tougher it is for a competitor to gain market share.
6. Is It Cheap?
- This is one of the hardest things to do. It is to determine a company's Intrinsic value.
- You can do this by analyzing a number of business fundamentals including earnings, revenues, and assets.
- A company's intrinsic value is usually higher (and more complicated) than its liquidation value. The liquidation value doesn't include intangibles such as value of a brand name, which is not directly stated on the financial statements.
- Understand the intrinsic value can be a very hard thing to do but, if done correctly, it can make you as successful as Buffet.