Brian Feroldi on LinkedIn: The Investing Risk Pyramid The classic definition of risk is measured in… | 32 comments (2024)

What do Apple, Costco Wholesale, and Tesla have in common?They all dominate their industry thanks to scale economics.What is scale economics (or 'economies of scale')?They are the cost advantages a business can exploit by expanding its size, output, or scale of operations. Scale economics allow a company to produce a product or service at a lower internal cost competitors.This enables them to offer lower prices to customers, enjoy higher margins, or both!There are seven key aspects that investors must know:💵 𝗟𝗼𝘄𝗲𝗿 𝗨𝗻𝗶𝘁 𝗖𝗼𝘀𝘁𝘀: By reducing per unit production cost, businesses can offer lower prices or enjoy higher margins.🔋 𝗜𝗻𝗰𝗿𝗲𝗮𝘀𝗲𝗱 𝗕𝗮𝗿𝗴𝗮𝗶𝗻𝗶𝗻𝗴 𝗣𝗼𝘄𝗲𝗿: Scale increases negotiation leverage with suppliers and customers due to larger volume trades.💳 Better Financing: Bigger size makes it easier to access more favorable financing.💻 𝗔𝗱𝘃𝗮𝗻𝗰𝗲𝗱 𝗧𝗲𝗰𝗵𝗻𝗼𝗹𝗼𝗴𝘆 𝗮𝗻𝗱 𝗜𝗻𝗻𝗼𝘃𝗮𝘁𝗶𝗼𝗻: Scale enables companies to invest in the latest technology that makes it easier to produce goods.📺 𝗠𝗮𝗿𝗸𝗲𝘁 𝗗𝗼𝗺𝗶𝗻𝗮𝗻𝗰𝗲 𝗮𝗻𝗱 𝗕𝗿𝗮𝗻𝗱 𝗥𝗲𝗰𝗼𝗴𝗻𝗶𝘁𝗶𝗼𝗻: Wide brand recognition helps drive customer loyalty and higher prices.👥 𝗗𝗶𝘃𝗲𝗿𝘀𝗶𝗳𝗶𝗰𝗮𝘁𝗶𝗼𝗻: Expanding into different products or markets reduces business risks and uncovers new revenue streams.🌏 𝗚𝗹𝗼𝗯𝗮𝗹 𝗥𝗲𝗮𝗰𝗵: Scale enables businesses to expand around the world, which opens doors to new customers & markets.What companies can you think of the benefit from scale economics?Follow me Brian Feroldi for more content like this.If you found this post useful, please repost ♻️ to share with your audience.

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How to analyze a balance sheet - FASTAnswer these questions: ASSETS:1️⃣ How much Cash & Equivalents does the company have?Why: Cash creates options. 2️⃣ Are there any Accounts Receivables?Why: Ideally, a company gets paid right away for sales and does not issue credit to its customers.3️⃣ Is there any Inventory? How much?Why: Ideally, companies do not hold inventory, which is a drag on cash generation.4️⃣ Is there any goodwill? How much?Why: Ideally, a company grows organically and has no goodwill.5️⃣ What is the company's biggest asset?Why: Ideally, its biggest asset is cash, indicating it is a capital-light business.LIABILITIES:6️⃣ How much Debt does the company have?Why: Great companies don't need to use debt to fund themselves.7️⃣ Does the company have any Deferred Revenue?Why: Deferred revenue means a company gets paid before it has to deliver the product/service. That produces cash and is a great sign.8️⃣ What is the company's biggest liability?Why: Ideally, its biggest liability is smaller than its cash balance.SHAREHOLDER EQUITY:9️⃣ Does the company have any Preferred Stock?Why: Strong companies don't need to issue preferred stock to fund themselves.🔟 Are Retained Earnings positive & growing?Why: Strong companies fund themselves through reinvesting retained earnings.1️⃣1️⃣ Is there any Treasury Stock?Why: Treasury stock means a company is buying back stock from shareholders. That's a positive sign.1️⃣2️⃣ How has the company primarily been funded? Why: Strong companies don't need to issue debtto fund themselves.Here are 4 ratios that are helpful to look at:1: Quick Ratio: Cash + Equivalents + AR / Current Liabilities2: Current Ratio: Current Assets / Current Liabilities3: Debt-to-Equity Ratio: Total Liabilities / Shareholder Equity4: Goodwill-to-Assets Ratio: Goodwill / Total AssetsTo be clear, this isn't all of the balance sheet analysis that you should do.What analysis did I miss? Let me know below!Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eNQcpx-xIf you found this post useful, please repost ♻️ to share with your audience.

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20 Most Confusing Finance Terms - Explained 💡FIXED COSTS VS. VARIABLE COSTS• Fixed Costs: Costs that do not change with production or sales volume (e.g., rent).• Variable Costs: Costs that vary with production or sales volume (e.g., materials, direct labor).EBITDA VS. NET INCOME• EBITDA: Earnings before interest, taxes, depreciation, and amortization.• Net Income: Total profit after all expenses, including interest, taxes, depreciation, and amortization.PROFIT VS. REVENUE• Profit: Net earnings after deducting all expenses. • Revenue: Total Income generated from sales or services before deducting expenses.CAPEX VS. OPEX• CapEx: Funds used by a company to acquire, upgrade, and maintain physical assets (PPE, buildings, or intangibles)• OpEx: Day-to-day expenses to run the business (e.g., rent, utilities).ACCRUAL VS. CASH ACCOUNTING• Accrual Accounting: Recording revenues and expenses when they are incurred, regardless of when cash is exchanged.• Cash Accounting: Recording revenues and expenses only when cash is exchanged.MARKET CAP VS. ENTERPRISE VALUE• Market Cap: Total value of a company's outstanding shares.• Enterprise Value: Total value of a company, including debt and excluding cashIs anything still confusing? Let me know in the comments below!Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eNQcpx-xIf you found this post useful, please repost ♻️ to share with your audience.

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P&L Statement, VisualizedIf you're in business, you MUST understand how a Profit & Loss Statement works.P&L has many different names, including:→Income Statement→Revenue Statement→Earnings Statement→Operating Statement→Statement of Earnings→Statement of OperationsThe P&L shows a company's profitability at multiple levels over a period of time using accrual accounting.Its purpose is to track a company's revenue, expenses, and profits.Main sections:💰 REVENUE: Total Sales➖ COST OF GOODS SOLD: The cost to deliver the product or service💰 GROSS PROFIT: Revenue - Cost of Goods Sold➖ R&D EXPENSES: All expenses related to developing products & services➖ SG&A EXPENSES: All other overhead expenses💰 OPERATING INCOME: Gross Profit - Operating Expenses➖ INTEREST EXPENSE: Interest paid to bondholders & banks💰 PRE-TAX INCOME: Operating Income - Interest Expense➖ INCOME TAX: Taxes paid to Governments💰 NET INCOME: Pre-Tax Income - Income TaxTo analyze a P&L quickly, focus on changes in margins.GROSS MARGIN 📊Gross margin is a profitability metric that indicates the percentage of revenue after subtracting the cost of goods sold (COGS).Calculation 🔢Gross Margin = Gross Profit / RevenueGross Profit = Revenue - COGSOPERATING MARGIN 📊Operating margin, or operating profit margin, measures the percentage of operating income (profit after operating expenses) relative to total revenue.Calculation 🔢Operating Margin = Operating Income / RevenueNET MARGIN 📊Net margin, also referred to as net profit margin or simply profit margin, represents the percentage of net income (profit after all expenses, including interest and taxes) relative to total revenue.Calculation 🔢Net Margin = Net Income / RevenueWas this visual helpful? Let me know in the comments section below!Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eKbRV7g6

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Stock Options vs RSUs vs ESPPWhat's the difference?All of these are forms of stock-based compensation (SBC).SBC is when a company pays its employees in equity instead of cash. If the company does well, the stock can become worth more money over time, which incentivizes the employee to help the organization succeed.TYPES OF SBC 📈𝗦𝘁𝗼𝗰𝗸 𝗢𝗽𝘁𝗶𝗼𝗻𝘀:• WHAT: The right to buy company stock at a set price after a certain period.• RISK/REWARD: High potential gain if stock prices rise, but risky if they fall.• VESTING: Usually 1-4 years𝗥𝗲𝘀𝘁𝗿𝗶𝗰𝘁𝗲𝗱 𝗦𝘁𝗼𝗰𝗸 𝗨𝗻𝗶𝘁𝘀 (𝗥𝗦𝗨𝘀):• WHAT: Shares given to employees, which become fully theirs over time.• RISK/REWARD: Lower risk than options, since they have value as long as the stock does.• VESTING: Similar to options, promoting retention.𝗘𝗺𝗽𝗹𝗼𝘆𝗲𝗲 𝗦𝘁𝗼𝗰𝗸 𝗣𝘂𝗿𝗰𝗵𝗮𝘀𝗲 𝗣𝗹𝗮𝗻𝘀 (𝗘𝗦𝗣𝗣𝘀):• WHAT: Allows employees to buy company stock at a discount.• RISK/REWARD: Lower risk with immediate value from discounts, though still subject to market changes.• VESTING: Shorter periods, offering quicker benefits.ADVANTAGES OF SBC:• Potential for High Returns• Alignment of Interests• Tax Benefits• Wealth Building• Employee Retention• Cash Conservation for CompanyDISADVANTAGES OF SBC:• Risk of Decrease in Value• Complexity and Understanding• Lack of Diversification• Market Fluctuations• Liquidity Issues• Tax ComplicationsVesting is the process by which an individual earns the right to a future benefit, typically shares of stock or rights to a pension, over a certain period of time or upon meeting certain conditions. Follow me Brian Feroldi for more content like this.If you found this post useful, please repost ♻️ to share with your audience.

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The ABCs of Accounting 🧑🏫A Quick Reference Guide of Accounting Terms.• Assets• Balance Sheet• Cash Flow• Debt• Equity• Financial Statements• Gross Margin• Historical Cost• Income Statement• Journal Entries• Key Performance Indicator• Liquidity• Market Value• Net Income• Owners Equity• Operating Expenses• Profit• Quarterly Reports• Revenue• Solvency• Taxes• Unearned Revenue• Valuation• Working Capital• XIRR• Yield• Z-ScoreHow many of these terms do you know?Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/e9rrxPt3If you found this post useful, please repost ♻️ to share with your audience.

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10 Growth KPIs What gets measured gets managed.Here's a list of growth KPIs every company & investor should know:📈 Revenue Growth• Measures the increase in revenue over a specific period, typically expressed as a percentage.→ Formula: ((Current Revenue - Previous Revenue) / Previous Revenue) x 100💰 Monthly Recurring Revenue (MRR)• Tracks the predictable and recurring revenue generated.→ Formula: Average Revenue Per User x Number of Customers➗ Gross Margin •The percentage of revenue remaining after deducting the cost of goods sold.→ Formula: (Revenue - Cost of Goods Sold) / Revenue)×100👤 Customer Acquisition Cost (CAC)• Calculates how much it costs to acquire each new customer.→ Formula: Sales and Marketing Expense / Number of New Customers Acquired 💵 Customer Lifetime Value (CLV)• Assesses the total value a customer brings to the company throughout their lifetime.→ Formula: Average Purchase Value x Average Purchase Frequency × Average Customer Lifespan🤗 Customer Retention Rate (CRR)• The percentage of customers who continue to use your product or service over time.→ Formula: (Number of Customers at the End of the Period - Number of New Customers Acquired) / Number of Customers at the Start of the Period) x 100⤵️ Churn Rate• The rate at which customers stop using or subscribing to your product or service.→ Formula: (Number of Customers at the Start of the Period - Number of Customers at the End of the Period) / Number of Customers at the Start of the Period😀 Customer Satisfaction Score (CSAT)• The level of satisfaction that customers have with a company's product, service, or overall experience.→ Formula: (Number of Satisfied Responses / Total Responses) × 100💬 Net Promoter Score (NPS)• Measures how likely customers are to recommend a company's product or service to others.→ Formula: (% of Promoters) - (% of Detractors)📊 Market Share• A company's portion of the total market in terms of revenue.→ Formula: (Your Company's Sales / Total Market Sales) × 100Which growth metrics do you value most?Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/e9rrxPt3If you found this post useful, please repost ♻️ to share with your audience.

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𝗘𝗩𝗔 𝘃𝘀 𝗜𝗥𝗥 𝘃𝘀 𝗡𝗣𝗩 𝘃𝘀 𝗣𝗣What's the difference?Here's a simplified overview:𝟭. 𝗘𝗰𝗼𝗻𝗼𝗺𝗶𝗰 𝗩𝗮𝗹𝘂𝗲 𝗔𝗱𝗱𝗲𝗱 (𝗘𝗩𝗔):• 𝗪𝗵𝗮𝘁 𝗶𝘁 𝗶𝘀: Evaluates company's financial performance by subtracting the cost of capital from net operating profit after tax.• 𝗣𝗿𝗼𝘀: Promotes value creation; encourages efficient capital utilization.• 𝗖𝗼𝗻𝘀: Complex and requires comprehensive financial details.• 𝗪𝗵𝗲𝗻 𝘁𝗼 𝗨𝘀𝗲: Ideal for internal performance reviews and managing based on value.𝟮. 𝗜𝗻𝘁𝗲𝗿𝗻𝗮𝗹 𝗥𝗮𝘁𝗲 𝗼𝗳 𝗥𝗲𝘁𝘂𝗿𝗻 (𝗜𝗥𝗥):• 𝗪𝗵𝗮𝘁 𝗶𝘁 𝗶𝘀: The rate where the net present value (NPV) of all cash flows is zero.• 𝗣𝗿𝗼𝘀: Reflects investment efficiency; facilitates comparison with required returns.• 𝗖𝗼𝗻𝘀: Multiple results for fluctuating cash flows; assumes reinvestment at IRR.• 𝗪𝗵𝗲𝗻 𝘁𝗼 𝗨𝘀𝗲: Effective for comparing project profitability; when the capital cost is unknown.𝟯. 𝗡𝗲𝘁 𝗣𝗿𝗲𝘀𝗲𝗻𝘁 𝗩𝗮𝗹𝘂𝗲 (𝗡𝗣𝗩):• 𝗪𝗵𝗮𝘁 𝗶𝘁 𝗶𝘀: Calculates the difference between present values of cash inflows and outflows.• 𝗣𝗿𝗼𝘀: Acknowledges the time value of money; offers a clear profitability measure.• 𝗖𝗼𝗻𝘀: Needs precise estimation of future cash flows.• 𝗪𝗵𝗲𝗻 𝘁𝗼 𝗨𝘀𝗲: Best for assessing absolute investment value; good for comparing various projects.𝟰. 𝗣𝗮𝘆𝗯𝗮𝗰𝗸 𝗣𝗲𝗿𝗶𝗼𝗱 (𝗣𝗣):• 𝗪𝗵𝗮𝘁 𝗶𝘁 𝗶𝘀: Time required for an investment to generate cash equal to its cost.• 𝗣𝗿𝗼𝘀: Straightforward and assesses risk and liquidity.• 𝗖𝗼𝗻𝘀: Ignores the time value of money; doesn’t evaluate overall profitability.• 𝗪𝗵𝗲𝗻 𝘁𝗼 𝗨𝘀𝗲: Great for initial project screening or limited funds; focuses on speed of return.Selecting the right metric is crucial for accurate financial analysis and strategic decision-making.Which method do you prefer?Follow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/e9rrxPt3If you found this post useful, please repost ♻️ to share with your audience.

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What are margins?Here's a simple explanation.Margin refers to the percentage difference between the costs and revenue of products or services. It indicates how much profit a company makes on its sales after covering various costs. Higher margins indicate more efficient operations and stronger financial health.Here are the 6 most important margins to know:𝗚𝗥𝗢𝗦𝗦 𝗠𝗔𝗥𝗚𝗜𝗡The percentage of revenue remaining after subtracting the cost of goods sold. It's a measure of production efficiency and pricing strategy.- 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻: (Revenue - COGS) / Revenue𝗢𝗣𝗘𝗥𝗔𝗧𝗜𝗡𝗚 𝗠𝗔𝗥𝗚𝗜𝗡 (𝗘𝗕𝗜𝗧 𝗠𝗔𝗥𝗚𝗜𝗡): The percentage of revenue remaining after subtracting 𝘁𝗵𝗲 cost of goods sold and all operating expenses.- 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻: Operating Income / Revenue𝗘𝗕𝗜𝗧𝗗𝗔 𝗠𝗔𝗥𝗚𝗜𝗡:Measures earnings before interest, taxes, depreciation, and amortization as a percentage of revenue.- 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻: EBITDA / Revenue 𝗣𝗥𝗘𝗧𝗔𝗫 𝗠𝗔𝗥𝗚𝗜𝗡 (𝗘𝗕𝗧 𝗠𝗔𝗥𝗚𝗜𝗡):The company's profitability before subtracting income taxes.- 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻: Earnings Before Taxes / Revenue𝗡𝗘𝗧 𝗠𝗔𝗥𝗚𝗜𝗡 (𝗣𝗥𝗢𝗙𝗜𝗧 𝗠𝗔𝗥𝗚𝗜𝗡):Measures the percentage of revenue that becomes net income after subtracting all expenses.- 𝗖𝗮𝗹𝗰𝘂𝗹𝗮𝘁𝗶𝗼𝗻: Net Income / RevenueUnderstanding margins is crucial for investors, managers, and stakeholders to evaluate a company's operational efficiency. Each margin tells a different story, from production costs to overall profitability, providing a comprehensive picture of the company's financial performance.10 Benefits of Using Margins- Trend Analysis- Pricing Strategy- Risk Management- Financial Planning- Cost Management- Investment Decisions- Comparative Analysis- Operational Efficiency- Performance Incentives- Profitability AssessmentFollow Brian Feroldi for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/e9rrxPt3If you found this post useful, please repost ♻️ to share with your audience.

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