Hey Reader,
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Did you know? Jeff Bezos's first job was at McDonald's. He later worked on Wall Street at various financial and tech companies, becoming the youngest-ever senior vice president at D.E. Shaw before founding Amazon.

In today's issue:

• Cash flow statement red flags (3 warning signs)
• Michael Mauboussin shares the ultimate resource in all things moats
• Ratio benchmarking
• Joel Greenblatt on what to look for in financials
• Much more....

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Brian Feroldi shares with us Cash Flow Statements red flags and their three warning signs. (Always a great lesson).

The Brooklyn Investor tackles Mr Buffett vs Mr. Market, who wins?

Michael Mauboussin with the ultimate resource for all things moats (must read).

The 10k Diver breaks down the problem with the Debt to Equity ratio and how we use it.

Peter Lynch earned 29% CAGR over 13 years, here's a breakdown showing how he did it and what we can learn.

Rob Vinall breaks down 5 Moat Myths in this fantastic video.

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🔍DEEP DIVE

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Ratios are an integral part of investing analysis.

But what is a good number?

Let’s unpack them today.

Financial ratios are important tools that help us understand how well a company is doing. They give us a quick way to compare different companies or see how a company is performing over time.

Here are some key financial ratios and what they mean:

1. 𝗚𝗿𝗼𝘀𝘀 𝗠𝗮𝗿𝗴𝗶𝗻: This ratio shows how much money a company keeps from its sales after paying for the cost of goods sold. A higher gross margin, usually above 40%, means the company is keeping more money from each sale.
2. 𝗡𝗲𝘁 𝗜𝗻𝗰𝗼𝗺𝗲 𝗠𝗮𝗿𝗴𝗶𝗻: This tells us how much profit a company makes for every dollar of sales after all expenses. A good net income margin is typically above 10%.
3. 𝗙𝗿𝗲𝗲 𝗖𝗮𝘀𝗵 𝗙𝗹𝗼𝘄 𝗠𝗮𝗿𝗴𝗶𝗻: This ratio shows how much cash a company generates after spending on capital expenses. A positive free cash flow margin is a good sign, indicating the company has money left over to invest or pay dividends.
4. 𝗥𝗲𝘁𝘂𝗿𝗻 𝗼𝗻 𝗜𝗻𝘃𝗲𝘀𝘁𝗲𝗱 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 (𝗥𝗢𝗜𝗖): This measures how well a company uses its capital to generate profits. A ROIC above 15% is generally considered strong.
5. 𝗥𝗲𝘁𝘂𝗿𝗻 𝗼𝗻 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗘𝗺𝗽𝗹𝗼𝘆𝗲𝗱 (𝗥𝗢𝗖𝗘): Similar to ROIC, this ratio shows how efficiently a company uses its capital. A ROCE above 15% is also a good benchmark.
6. 𝗥𝗲𝘁𝘂𝗿𝗻 𝗼𝗻 𝗘𝗾𝘂𝗶𝘁𝘆 (𝗥𝗢𝗘): This ratio tells us how well a company uses shareholders’ money to generate profit. A ROE above 15% is often seen as good.
7. 𝗖𝘂𝗿𝗿𝗲𝗻𝘁 𝗥𝗮𝘁𝗶𝗼: This measures a company’s ability to pay its short-term debts with its short-term assets. A current ratio above 1.5 is usually healthy.
8. 𝗤𝘂𝗶𝗰𝗸 𝗥𝗮𝘁𝗶𝗼: Similar to the current ratio, but it excludes inventory. A quick ratio above 1 is considered good.
9. 𝗗𝗲𝗯𝘁 𝗥𝗮𝘁𝗶𝗼: This shows how much of a company’s assets are financed by debt. A lower debt ratio, below 0.5, is generally safer.
10. 𝗗𝗲𝗯𝘁 𝘁𝗼 𝗘𝗾𝘂𝗶𝘁𝘆 𝗥𝗮𝘁𝗶𝗼: This compares a company’s total debt to its shareholders’ equity. A ratio below 1 is often preferred, indicating the company is not too reliant on debt.

Understanding these ratios and their benchmarks can help you make better decisions when investing in or evaluating companies.

📖Knowledge Tidbits

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The Investing for Beginners Podcast @IFB_podcast Joel Greenblatt on What to Focus On: h/t @marketplunger1 12:2 PM • Nov 9, 2024 100 Retweets 703 Likes Read 6 replies

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Thanks,
Dave Ahern
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​einvestingforbeginners.com​
​Investing for Beginners Podcast​

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