What are the 8 Balance Sheet Yellow Flags? | Brian Stoffel posted on the topic | LinkedIn (2024)

How to calculate 7 common valuation ratios: 📈Using Enterprise Value (EV):1️⃣ Enterprise Value-to-Sales ratio (EV/S ratio)➗ Enterprise Value divided by Sales 💰2️⃣ Enterprise Value-to-Gross Profit ratio (EV/GP ratio)➗ Enterprise Value divided by Gross Profit 💰3️⃣ Enterprise Value to EBITDA ratio (EV/EBITDA)➗ Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) 💰4️⃣ Enterprise Value to EBIT ratio (EV/EBIT)➗ Enterprise Value divided by Earnings Before Interest, Taxes (EBIT) 💰5️⃣ Enterprise Value to EBT ratio (EV/EBT)➗ Enterprise Value divided by Earnings Before Taxes (EBT) 💰6️⃣ Enterprise Value to Earnings ratio (EV/E)➗ Enterprise Value divided by Earnings 💰7️⃣ Enterprise Value to Free Cash Flow ratio (EV/FCF)➗Enterprise Value divided by Free Cash Flow 💰➡ Enterprise Value measures a company's total value.It is calculated by taking the market capitalization of a company, adding its debt, and subtracting its cash.Think of it as the true price of acquiring a business.When you buy a business, you assume all of its debts (which makes it MORE expensive), but you also take control of all of its cash (which makes it LESS expensive).➡ Market capitalization refers to the total value of a company's outstanding shares of stock.It is calculated by multiplying the current market price of one share by the total number of shares outstanding.This metric indicates how much the market values the company's equity.➡ Free cash flow (FCF) is a measure of a company's cash generation capabilities.It is calculated as operating cash flow minus capital expenditures (money spent on purchasing or maintaining property, plant, and equipment).It represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.Note that these formulas are simply the most common ways to calculate each ratio, and there may be variations or additional factors to consider depending on the specific company or industry being analyzed. 🤔Follow meBrian Stoffelfor 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/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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10 ways to teach your kids good money skills. 💵1️⃣ Talk to them about the importance of saving. This is the most important money skill to master (by far)!2️⃣ Live below your means yourself. They are watching everything that you do.3️⃣ Talk openly about money. It shouldn't be taboo. Money affects nearly every aspect of our lives.4️⃣ Pay them to write a 1-page summary on great money books. The lessons they learn will be well worth the "fee".5️⃣ Match their savings, dollar for dollar, on their birthday, but make them invest in the match. This will help to build a nest egg for them.6️⃣ Give them $100 in cash on vacations. Make them pay for at least some of their expenses. Extra food. Gifts. Treats. They'll learn a lot about money management!7️⃣ Listen to podcasts about money while driving with them in the car. They'll pick up tips & tricks along the way.8️⃣ Gift them stock in companies they like for birthdays & holidays. Make it fun to track their portfolio and see how they are building wealth without doing anything.9️⃣ Talk about businesses they like/know at dinner. Ask questions like: How do they make money? Why do you like them better than competitors?🔟 Encourage them to start a business. Lemonade stand. Youtube channel. Selling baseball cards. Mowing lawns. Babysitting. Anything that makes money!I have three kids myself, so I'm always looking for ways to teach them money skills.What other tips & tricks do you know?I'd love to hear about them in the comments section below!Follow meBrian Stoffelfor 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/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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Warren Buffett’s Income Statement Rules of Thumb:1: Gross Margin🧮 Equation: Gross Profit / Revenue👍 Rule of Thumb: 40% or higher🤔 Buffett's Logic: A consistently high gross margin signals that the company isn’t competing exclusively on price.2: SG&A Margin🧮 Equation: SG&A Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Wide-moat companies don’t need to spend a lot on overhead to operate & get consumers to buy.3: R&D Margin🧮 Equation: R&D Expense / Gross Profit👍 Rule of Thumb: 30% or lower🤔 Buffett's Logic: Buffett doesn't want to own companies that need to constantly invent the next great product to do well.4: Depreciation Margin🧮 Equation: Depreciation / Gross Profit👍 Rule of Thumb: 10% or lower🤔 Buffett's Logic: Buffett doesn't like businesses that constantly need to invest in depreciating assets to maintain their competitive advantage.5: Interest Expense Margin🧮 Equation: Interest Expense / Operating Income👍 Rule of Thumb: 15% or lower🤔 Buffett's Logic: Great businesses have such wonderful economics that they don’t need debt to finance themselves.6: Income Tax Expenses🧮 Equation: Taxes Paid / Pre-Tax Income👍 Rule of Thumb: Current Corporate Tax Rate🤔 Buffett's Logic: Great businesses make so much money that they are consistently forced to pay their full share of taxes.7: Net Margin (Profit Margin)🧮 Equation: Net Income / Sales👍 Rule of Thumb: 20% or higher🤔 Buffett's Logic: Companies that consistently convert 20% of their revenue into net income are more likely to have a durable competitive advantage.8: Earnings Per Share Growth🧮 Equation: Year 2 EPS / Year 1 EPS👍 Rule of Thumb: Positive & Growing🤔 Buffett's Logic: Great companies consistently generate profits and increase them every year regardless of the operating environment.3 Important notes:1⃣ These “rules of thumb” are only useful when a company is mature and fully optimized for profits.2⃣ CONSISTENCY is key. The real test is if a company generates good numbers over multiple years & various economic cycles.3⃣ There are PLENTY of exceptions & nuances to these rules. Many of Buffett’s largest holdings do not pass every rule of thumb. That’s because investing & accounting have TONS of nuances.What "rules of thumb" do you use to make investing decisions?Follow meBrian Stoffelfor 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/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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Naval Ravikant's Life Formulas:😁 Happiness = Health + Wealth + Good Relationships❤️ Health = Exercise + Diet + Sleep🏃♂️ Exercise = High Intensity Resistance Training + Sports + Rest🥕 Diet = Natural Foods + Intermittent Fasting + Plants🛏 Sleep = No alarms + 8-9 hours + Circadian rhythms💰 Wealth = Income + Wealth * (Return on Investment)💸 Income = Accountability + Leverage + Specific Knowledge🤝 Accountability = Personal Branding + Personal Platform + Taking Risk?📈 Leverage = Capital + People + Intellectual Property🤔 Specific Knowledge = Knowing how to do something societycannot yet easily train other people to do💹 Return on Investment = Buy-and-Hold + Valuation + Margin of Safety [72]These formulas come from the book The Almanac of Naval Ravikant (highly recommended).Follow meBrian Stoffelfor 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/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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7 Cash Flow RatiosEarnings are an opinion. Cash is a fact.Watch these cash flow ratios to judge how a company is REALLY performing:1: Cash Ratio🧮 Cash / Current Liabilities.➡️ It shows the company's ability to pay off its short-term debts using only its cash reserves.2:Operating Cash Flow Ratio:🧮 Operating Cash Flow / Current Liabilities.➡️ It shows the company's ability to pay off its current liabilities using its operating cash flow.3:Free Cash Flow to Sales Ratio:🧮 Free Cash Flow / Trailing Twelve Month Sales.➡️ It shows how much cash a company generates from its revenue after deducting all capital expenditures.4: Free Cash Flow to Sales Ratio:🧮 Share Price / Operating Cash Flow Per Share.➡️ It shows how much investors are willing to pay for each dollar of operating cash flow.5: Cash Flow Return on Investment (CFROI):🧮 Present Value of Cash Flow / Invested Capital.➡️ It shows the return on investment generated by a company's cash flow.6: Debt to Operating Cash Flow Ratio:🧮 Total Debt / Operating Cash Flow.➡️ It shows how many years it would take for a company to pay off its debt using its operating cash flow.7: Cash Flow Margin:🧮 Operating Cash Flow / Revenue.➡️ It shows how much of each dollar of revenue is converted into cash flow.This post was inspired byChristian Wattig-- a WONDERFUL FP&A teacher.Follow him!Follow meBrian Stoffelfor 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/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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9 Handmade Investing Visuals Every Investor Should See.Visuals Credit:Vishal Khandelwalfrom Safal NiveshakFollow Vishal for more excellent content like this!***Follow me Brian Stoffel 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/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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Investor conference calls are FILLED with jargon.Here are 13 common terms explained in plain English:"Color" → To provide more details on a subject."Churn"→ Customers who stopped buying from us."Double click"→ Provide more details."Elongated Sales Cycle"→ Demand is weak.“Green Shoots”→ We’ve invested a lot but have not seen much return yet."Inorganic growth"→ We grew from mergers & acquisitions"Investing in our people" → Employee costs are rising fast.“Move the needle" → Increasing sales enough to change the growth rate.“Low hanging fruit" → Easy opportunities for improvement.“Land and expand" → A small initial sale that leads to larger opportunities."Investing in Price" → Competitive pressures forced us to lower prices."Organic growth"→ Increasing sales of internally developed products."Softness" → Demand for our products & services is weak."Streamline" → We fired a bunch of employees."We'll take this offline" → I haven't scripted an answer to your question.Follow me Brian Stoffel 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/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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8 Balance Sheet Yellow Flags:1: CASH & CASH EQUIVALENTS → Less Than Total Debt 🇳🇺2: ACCOUNTS RECEIVABLE → Rising Faster Than Revenue 🇳🇺3: INVENTORY → Rising Faster Than Profits 🇳🇺4: GOODWILL → More Than 50% of Total Assets 🇳🇺5: INTANGIBLE ASSETS → More Than 50% of Total Assets 🇳🇺6: SHORT-TERM DEBT & LONG-TERM DEBT → More Than Cash 🇳🇺7: PREFERRED STOCK → There Shouldn’t Be Any 🇳🇺8: RETAINED EARNINGS → A Negative Number 🇳🇺IMPORTANT: I labeled these as "Yellow" flags for a reason.Lots of companies have good reasons to violate these balance sheet rules of thumb.For example, Home Depot currently has negative retained earnings.Typically, that's a yellow flag.But, in Home Depot's case, the company has been aggressively buying back stock for years (a good thing!).Buying back stock reduces Retained Earnings.Home Depot has repurchased so much stock that Retained Earnings have gone negative.There are also good reasons for companies to hold less cash than debt, issue preferred stock, have rising inventories, and hold lots of intangible assets.The point is that if you see one of these eight yellow flags, you should investigate further.Accounting is filled with nuance.Follow me Brian Stoffel 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/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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How to analyze a balance sheet in <2 minutes.Study these 4 ratios:⚖ 1: Quick Ratio❓ Question: Can the company pay its bills?➗ Equation: Cash + Equivalents + AR / Current Liabilities🔢 Guide:Fragile = <1.0Robust = 1 to 1.5Antifragile = <0.7⚖ 2: Current Ratio❓ Question: How well does the company manage its assets?➗ Equation: Current Assets / Current Liabilities🔢 Guide:Fragile = <0.7Robust = 1Antifragile = >2.5⚖ 3: Debt-to-Equity Ratio❓ Question: How much leverage is the company using?➗ Equation: Total Liabilities / Shareholder Equity🔢 Guide:Fragile = >2.0Robust = ~1Antifragile = <0.7⚖ 4: Goodwill-to-Assets Ratio❓ Question: Is the company growing organically?➗ Equation: Goodwill / Total Assets🔢 Guide:Fragile = >50%Robust = 10% - 50%Antifragile = <10%To be clear, this isn't all of the balance sheet analysis that you should do.But, looking at these four ratios can get you 90% of the way there in less than 2 minutes..Follow me Brian Stoffel 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/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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How to calculate 7 common valuation ratios: 📈1. Price-to-Sales ratio (P/S ratio) ➗Market Capitalization divided by Sales2. Price-to-gross profit ratio (P/GP ratio) ➗Market Capitalization divided by Gross Profit.3. Price to EBITDA ratio (P/EBITDA)➗Market Capitalization divided by Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) 💰4. Price to EBIT ratio (P/EBIT)➗Market Capitalization divided by Earnings Before Interest, Taxes (EBIT) 💰5. Price to EBT ratio (P/EBT)➗Market Capitalization divided by Earnings Before Taxes (EBT) 💰6. Price to Earnings ratio (P/E)➗Market Capitalization divided by Earnings 💰7. Price to Free Cash Flow ratio (P/FCF)➗Market Capitalization divided by Free Cash Flow 💰➡ Market capitalization refers to the total value of a company's outstanding shares of stock.It is calculated by multiplying the current market price of one share by the total number of shares outstanding.This metric indicates how much the market values the company's equity.➡ Free cash flow (FCF) is a measure of a company's cash generation capabilities.It is calculated as operating cash flow minus capital expenditures (money spent on purchasing or maintaining property, plant, and equipment).It represents the cash that a company is able to generate after spending the money required to maintain or expand its asset base.Note that these formulas are simply the most common ways to calculate each ratio, and there may be variations or additional factors to consider depending on the specific company or industry being analyzed. 🤔Follow me Brian Stoffel 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/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience.

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