When costs are reduced, margins and profits increase.
Interpretation of Financial Statements - preliminary filters.
1. Looking for sustainable competitive advantage:
When looking for sustainable moat, you wanna see consistency - in earnings, in having low debt, in having growing earnings, low spending in capital expenditures, etc.
When costs are reduced, margins and profits increase.
Let's take a look at Apple:
i) You want to see earnings grow at a steady pace. Take a look at the net income below.
As a thumb rule, Warren Buffett wants to see a gross margin of around 40% or above.
Although not quite 40%, it's around that range with respect to Apple.
Samsung's gross margins are around similar range, highest being 45.7% in 2018, and Huawei had a gross margin of 38.6%.
Gross margin = (revenue - cost of goods sold) / revenue
Net margin = net income / revenue.
You want to see the company having higher net margin compared to their competitors.
Typically, net margin above 20% is a very strong one, indicating that we are dealing with a smoothly run business.
Look at the figure - "Retained Earnings".
Using retained earnings, you can find out if a company is reinvesting its income or not. A steady growth in this number means the business is profitable, and that it's identifying good investing opportunities.
To measure how efficiently a company is using these retained earnings, Return on Equity (ROE) is used.
Apple looks quite strong in this aspect. It's partly an effect of distributing a lot of their earnings to shareholders. It also signifies the sustainable competitive moat.
4) Exceptional businesses seldom require a lot of debt to expand (except maybe banks/NBFCs). Instead, they can just use the strong cashflow from the business.
This is where you see the actual in's and out's of money.
Look at "Capital Expenditures" on the cashflow statement.
This is the money being spent on properties, plant, and equipment.
Exceptions: One time payment to grow the business in some capex activity.
3 instances when you could consider selling the stock.
i) You need money for a better investments. This is more so applicable in a bear market, for you to switch from something great to something exceptional.
This may not always apply to all markets, all stocks. But with anything above 40PE, tread carefully and cautiously.
- Competitive advantage and scale
- Consistently high net income, return on equity
- Requires very little debt
- Retained earnings has steady growth
- Capital expenditures should be < 25%
- Sell a company if prices are crazy, or a better opportunity comes up.
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More from Shravan Venkataraman 🎡
** MEGA THREAD ON Cryptocurrencies/Blockchain**
I wanted to know the best resources to learn about cryptocurrencies and blockchain for someone with zero knowledge. I asked Twitter, and Twitter answered.
This thread is a compilation of the best resources I was recommended. 👇👇
Let's start with ** BOOKS **
The first thing you should do before you pick up any book:
Learn about Bitcoin & Ethereum by reading the respective whitepapers.
- [Bitcoin white paper](https://t.co/cErOaFn6QL) by Satoshi Nakamoto
- [Ethereum White paper] (https://t.co/0g5kYCGJGq) by Vitalik Buterin
Even if you are not tech savvy, you can get a good grasp about how blockchain functions from these papers.
1) *The Basics of Bitcoins and Blockchains: An Introduction to Cryptocurrencies and the Technology that Powers Them* by Antony Lewis
This book covers topics such as the history of Bitcoin, the Bitcoin blockchain, and Bitcoin buying, selling, and mining.
It also answers how payments are made and how transactions are kept secure.
Other cryptocurrencies and cryptocurrency pricing are examined, answering how one puts a value on cryptocurrencies and digital tokens.
I wanted to know the best resources to learn about cryptocurrencies and blockchain for someone with zero knowledge. I asked Twitter, and Twitter answered.
This thread is a compilation of the best resources I was recommended. 👇👇
Let's start with ** BOOKS **
The first thing you should do before you pick up any book:
Learn about Bitcoin & Ethereum by reading the respective whitepapers.
- [Bitcoin white paper](https://t.co/cErOaFn6QL) by Satoshi Nakamoto
- [Ethereum White paper] (https://t.co/0g5kYCGJGq) by Vitalik Buterin
Even if you are not tech savvy, you can get a good grasp about how blockchain functions from these papers.
1) *The Basics of Bitcoins and Blockchains: An Introduction to Cryptocurrencies and the Technology that Powers Them* by Antony Lewis
This book covers topics such as the history of Bitcoin, the Bitcoin blockchain, and Bitcoin buying, selling, and mining.
It also answers how payments are made and how transactions are kept secure.
Other cryptocurrencies and cryptocurrency pricing are examined, answering how one puts a value on cryptocurrencies and digital tokens.
More from Economy
$600/wk Unemployment Insurance cannot deliver the benefits of a $600/wk Job Guarantee. From the outset, I should say JG is not a replacement for UI, no matter what you may have heard. I’ll get to this later, but read this long 🧶 w/ that in mind.
Automatic stabilization: Both $600/wk UI and JG will provide counter cyclical spending. But UI will be weaker. Counter-cyclical stabilization is not just about the absence of income. It is also about the transmission and structure of economy
Firms don't like to hire the unemployed. Mass and long-term unemployment make the problem worse. JG would recover labor markets much faster than a UI of the same amount, both b/c of the higher direct, induced & tertiary employment effects & b/c of private firm hiring preferences.
JG stabilizes spending patterns better. Uncertain job prospects may mean more cautious spending from the unemployed compared to those w/ guaranteed jobs.
UI is temporary, which makes matters worse. Even if it were permanent, it still won't resolve the problem of job scarcity.
Nations who once achieved tight full employment through active labor market policies demonstrate that unemployment does NOT fluctuate the same way it does w/o them. Direct employment, ELR type policies diminish drastically/even eliminate these amplitudes (eg postwar Japan/Sweden)
Surprised so many smart people bought into the idea that $600/wk UI is the same as $600/wk job guarantee (or better) or that JG jobs must be inherently inessential. I\u2019ve addressed this many times & will post a thread later. Trying not to spend precious family time on Twitter.
— Pavlina R Tcherneva (@ptcherneva) December 29, 2020
Automatic stabilization: Both $600/wk UI and JG will provide counter cyclical spending. But UI will be weaker. Counter-cyclical stabilization is not just about the absence of income. It is also about the transmission and structure of economy
Firms don't like to hire the unemployed. Mass and long-term unemployment make the problem worse. JG would recover labor markets much faster than a UI of the same amount, both b/c of the higher direct, induced & tertiary employment effects & b/c of private firm hiring preferences.
JG stabilizes spending patterns better. Uncertain job prospects may mean more cautious spending from the unemployed compared to those w/ guaranteed jobs.
UI is temporary, which makes matters worse. Even if it were permanent, it still won't resolve the problem of job scarcity.
Nations who once achieved tight full employment through active labor market policies demonstrate that unemployment does NOT fluctuate the same way it does w/o them. Direct employment, ELR type policies diminish drastically/even eliminate these amplitudes (eg postwar Japan/Sweden)
1) Well, also there is this:
For 400 years inflation has NOT been in a "mountain range" of up and down, but rather stair-stepped in giant increases, always associated with major transformations in economic arrangements.
For 400 years inflation has NOT been in a "mountain range" of up and down, but rather stair-stepped in giant increases, always associated with major transformations in economic arrangements.
The only way that debt comes down is if rest of world flips to trade deficit status w/US (I.e., trades accumulates $USD from prior trade surpluses w/US for actual goods & services). Not likely anytime soon. $USD as global reserve currency requires massive public debt.
— David "Most Vicious Dogs & Ominous Weapons" Herr (@davidcherr) January 15, 2021
