💰Top Ten Ratios to Make You a Professional Investor

Hey Reader,

We've all heard of the power of compounding. Morgan Housel shared a story of Ronald Read, a janitor and gas station attendant who amassed an $8 million fortune by investing in blue-chip stocks and holding them for decades. Simple, beats complicated.

In today's issue:

Top metrics to help us become better investors
Some fairy tales related to the Fed and their mandates
Howard Marks drops another memo (must read, as always).
How to analyze a balance sheet
Much, much more....

💸Sponsored by:

Tired of losing to the market?

It's probably time to transform your portfolio.

Get rich steadily—with stock picks hidden in plain sight, & too reliable to ignore.

Featured monthly, only at Value Spotlight.

💎NUGGETS

Brian Feroldi breaks down the top ten ratios to make you a professional investor (great stuff, as always).

Aswath Damodaran breaks down the latest Fed rate decision and ongoing Fed fariy tales.

Honey, wake up; Howard Marks released another memo, "Shall We Repeal the Laws of Economics." (If Warren Buffett says this is his first read every morning, who am I to disagree?)

Simple is better, usually, but Conor Mac exposes the Complexity Paradox Curve and its impact on investors.

What we can learn from missing out on Netflix (up 250% since it's latest market meltdown). Turns out it is quite a lot.

Thomas Chua shares his Primer on Valuation (well worth the read).

🔍DEEP DIVE

How to Analyze a

Balance Sheet

The easiest way is to use metrics:

We can break down a balance sheet by three categories:

• Liquidity
• Solvency
• Efficiency

𝗟𝗶𝗾𝘂𝗶𝗱𝗶𝘁𝘆 𝗥𝗮𝘁𝗶𝗼𝘀

Measure short-term debt-paying ability of a company.

• Current Ratio =Current Assets / Current Liabilities
• Quick Ratio =Cash & Cash Equivalents + Accounts Receivables) / Current Liabilities
• Cash Ratio =Cash & Cash Equivalents / Current Liabilities

A ratio between 1-3 is a good sign for a company, suggesting that a business has enough cash to be able to pay its debts.

A ratio of < 1 means that the company can't pay its debts. It may be necessary to finance or extend the time required to pay creditors.

𝗦𝗼𝗹𝘃𝗲𝗻𝗰𝘆 𝗥𝗮𝘁𝗶𝗼𝘀

Measure a company's long-term paying ability.

• Debt-To-Equity Ratio = Total Debt / Total Equity
• Debt Ratio = Total Debt / Total Assets

A high ratio signifies a greater amount of debt and consequently, higher risk for the company.

𝗘𝗳𝗳𝗶𝗰𝗶𝗲𝗻𝗰𝘆 𝗥𝗮𝘁𝗶𝗼𝘀

Measure the efficiency of converting assets into cash.

• Receivables Turnover Ratio =Sales / Accounts Receivable
• Inventory Turnover Ratio =COGS / Inventories
• Asset Turnover Ratio =Sales / Total Assets

We can also measure efficiency in days.

Analyze balance sheets efficiently using liquidity, solvency, and efficiency ratios to assess a company's short-term and long-term debt management and asset utilization.