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Did you know? Charlie Munger faced significant personal adversity early in his life, including a difficult divorce and the loss of his son to leukemia, plus losing an eye to a botched surgery. Despite these challenges, he rebuilt his life and career, which is a testament to his resilience.

In today's issue:

• Learning how to analyze a balance sheet like Warren Buffett
• How to spot common errors in DCFs
• Why companies with high free cash flow margins and high yields outperform the markets
• Breaking down EBITDA
• Much more

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NUGGETS

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My Favorite Finds

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DCF (discounted cash flows) models are full of assumptions and errors, so why do we use them? Because they offer the best way to value companies in their life cycle. Michael Maubousssin points out some of the common errors here so we can grow from our mistakes.

Want to learn how to analyze a balance sheet like Warren Buffett? Who doesn't? Here Brian Feroldi lays out Buffett's five rules of thumb to analyze a balance sheet quickly.

How to find the next Amazon? We can learn a lot by deconstructing a compounder and finding out what makes them tick.

Choose your fighter: Visa or Mastercard. Use a guide created by Pieter to learn how to analyze these payment giants. From financial statements, management, growth, and valuation you can scan them quickly to determine if they warrant a deeper look.

Companies With High Free Cash Flow Margins and High Free Cash Flow Yields Massively Outperform the Market Over Time. John Rotonti explains why in his usual clear, concise writing style.

John Huber (Base Hit Investing) explains why Warren Buffett’s strength lies in quickly recognizing situations outside his circle of competence, avoiding complex investments like Sears and Freddie Mac, and admitting mistakes, exemplifying intellectual honesty.

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DEEP DIVE

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EBITDA

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Broken Down:

What is EBITDA? While it is a controversial topic in finance, it does have it’s uses.

I prefer free cash flow but it’s helpful to compare companies.

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EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.

It’s a popular financial metric used to evaluate a company’s operational performance.

Common terms related to EBITDA include “Operating Profit,” “Cash Flow Proxy,” and “Earnings Indicator.”

𝗖𝗼𝗺𝗽𝗼𝗻𝗲𝗻𝘁𝘀 𝗼𝗳 𝗘𝗕𝗜𝗧𝗗𝗔:

1. 𝗘𝗮𝗿𝗻𝗶𝗻𝗴𝘀 - Net income or profit.
2. 𝗕𝗲𝗳𝗼𝗿𝗲 𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁 - Excludes interest expenses, providing a clearer view of operating performance.
3. 𝗧𝗮𝘅𝗲𝘀 - Excludes taxes, focusing on operational efficiency.
4. 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 & 𝗔𝗺𝗼𝗿𝘁𝗶𝘇𝗮𝘁𝗶𝗼𝗻 - Non-cash expenses from a reduction in the value of assets. These are tangible and intangible.

𝗛𝗼𝘄 𝗶𝘁’𝘀 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗲𝗱:

Two common formulas are:

1. 𝗘𝗕𝗜𝗧𝗗𝗔 = Net Income + Interest + Taxes + Depreciation + Amortization
2. 𝗘𝗕𝗜𝗧𝗗𝗔 = Operating Income + Depreciation + Amortization

EBITDA Margin Formula:

𝗘𝗕𝗜𝗧𝗗𝗔 𝗠𝗮𝗿𝗴𝗶𝗻 = (EBITDA / Total Revenue) x 100

𝗣𝗿𝗼𝘀:

1. Comparability: EBITDA removes the effects of financing and accounting decisions. So, it allows for comparison across companies.
2. Cash Flow Insight: It serves as a proxy for cash flow from operations, highlighting core profitability.

𝗖𝗼𝗻𝘀:

1. Excludes Capital Expenditures: EBITDA doesn’t account for capital expenses, potentially overstating financial health.
2. Ignores Working Capital Changes: It may not accurately reflect changes in working capital, affecting the company’s actual cash flow.

EBITDA provides a comprehensive view of a company’s operational efficiency, but investors should also consider its limitations.

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EDUCATION

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Today's Bite

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Of Knowledge

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The Investing for Beginners Podcast @IFB_podcast Free Cash Flow Analysis: 9:4 AM • Aug 15, 2024 57 Retweets 297 Likes Read 2 replies

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

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