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.
https://t.co/nbKA5Bzpi6
https://t.co/MbmUKsE968
More from Shravan Venkataraman 🎡
Have you ever had 4-5 profitable trades in a row, and you bet all your profits on your next trade feeling "in the zone" only to lose it all?
That's called as "hot-hand fallacy" bias.
I ran a poll recently to outline two classic biases we have as humans.
Thread below 👇👇
1/ *Hot-Hand Fallacy* first had its origin in the game of basketball.
If a player shoots few baskets in a row, people generally predict that the next shot will also be a basket.
This is ignoring the fact that each shot is independent of the ones that came prior.
2/ In this poll, 41.1% people voted that the batsman who hit 4 sixes in a row, will hit a sixer in the 5th ball also.
This is classic hot-hand fallacy.
Each ball's outcome is independent.
The probability is not 50% FYI (number of outcomes is not 2).
These 148 people who voted that the next ball will also be a sixer, did so because they believe that the batsman is on a hot streak, and that his streak would continue.
This is an emotional bias and is usually attached to human performance related events only.
3/ 45.3% (162) people voted that the 5th ball would be a dot ball, meaning the batsman wouldn't score anything.
These people displayed the classic "negative-recency" bias, which is also called the "Gambler's Fallacy".
That's called as "hot-hand fallacy" bias.
I ran a poll recently to outline two classic biases we have as humans.
Thread below 👇👇
Let's say you see a cricketer hit four 6's in a row.
— Shravan Venkataraman \U0001f525\U0001f680\U0001f4b0 (@theBuoyantMan) December 30, 2020
If you have to bet on the next ball's outcome, what would you bet on?
1/ *Hot-Hand Fallacy* first had its origin in the game of basketball.
If a player shoots few baskets in a row, people generally predict that the next shot will also be a basket.
This is ignoring the fact that each shot is independent of the ones that came prior.
2/ In this poll, 41.1% people voted that the batsman who hit 4 sixes in a row, will hit a sixer in the 5th ball also.
This is classic hot-hand fallacy.
Each ball's outcome is independent.
The probability is not 50% FYI (number of outcomes is not 2).
These 148 people who voted that the next ball will also be a sixer, did so because they believe that the batsman is on a hot streak, and that his streak would continue.
This is an emotional bias and is usually attached to human performance related events only.
3/ 45.3% (162) people voted that the 5th ball would be a dot ball, meaning the batsman wouldn't score anything.
These people displayed the classic "negative-recency" bias, which is also called the "Gambler's Fallacy".
More from Economy
1/OK, let's take a little break from Coup Twitter, and think about an economic issue:
How can we build up the wealth of the middle class?
2/The typical American has surprisingly little wealth compared to the typical resident of many other developed countries.
This is a fact that is not widely known or appreciated.
3/Now, some people argue that stuff like Social Security or social insurance programs should be included in wealth. But I chose to focus on private wealth because I think having assets you can sell whenever you want is important to
4/For many decades after World War 2, middle-class wealth in America was on a smooth upward trajectory.
Then the housing crash came, and all that changed. Suddenly the rich were still doing well but everyone else was seeing the end of their American Dream.
5/Why the divergence?
Because the American middle class has its wealth in houses -- specifically, in the houses they live in.
It's the rich who own stocks.
How can we build up the wealth of the middle class?
2/The typical American has surprisingly little wealth compared to the typical resident of many other developed countries.
This is a fact that is not widely known or appreciated.
3/Now, some people argue that stuff like Social Security or social insurance programs should be included in wealth. But I chose to focus on private wealth because I think having assets you can sell whenever you want is important to
Yes, these numbers don't include things like Social Security, just privately held wealth. They're not an attempt to capitalize every possible future income stream.
— Noahtogolpe \U0001f407 (@Noahpinion) January 10, 2021
4/For many decades after World War 2, middle-class wealth in America was on a smooth upward trajectory.
Then the housing crash came, and all that changed. Suddenly the rich were still doing well but everyone else was seeing the end of their American Dream.
5/Why the divergence?
Because the American middle class has its wealth in houses -- specifically, in the houses they live in.
It's the rich who own stocks.
