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

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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Net Income vs Free Cash Flow - VisualizedThey are NOT the same thing!It took me a long time to grasp the difference.Seeing it visually helped me to understand it.Here's the key difference:💰 NET INCOME🔎 FOUND ON: Income Statement🔢 ACCOUNTING: Accrual➗ FORMULA: Revenue - All Expenditures = Net IncomeNet income measures a company’s profitability on the income statement using accrual accounting.It shows how much profit a company earned, in theory, during the period.It's an accountant's opinion of profit.Since it's an opinion, it can be easily manipulated.💰 FREE CASH FLOW🔎 FOUND ON: Cash Flow Statement🔢 ACCOUNTING: Cash➗ FORMULA: Operating Cash Flow - Capital Expenditures = Free Cash FlowFree cash flow measures the actual cash flow available to shareholders on the cash flow statement using cash accounting.It shows how much cash was generated by the company during the period.Since it measures actual cash generation, it's much harder to manipulate than Net Income.Remember: Net Income is an opinion. Free Cash Flow is a fact.Both numbers are important, but when forced to choose, I'll take free cash flow every time.Which questions do you have? Let me know in the comments section.***P.S. Want to level up your accounting skills? Join me for a FREE webinar on Wed, Feb 14th at 12:00 noon EST.Topic: 10 Metrics Every Investor Must KnowRSVP here:https://lnkd.in/g55kcsWAIf you found this post useful, please share (repost ♻️) to help make LinkedIn a better platform for all.

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EBITDA Explained SimplyEBITDA is an acronym that stands for Earnings Before Interest, Taxes, Depreciation & Amortization.EBITDA is a major financial indicator used to evaluate companies' profitability with different capital structures.EBITDA is a rough guide to show how much cash a business generates.Calculating EBITDA requires information from the company's Income Statement and Cash Flow Statement.Here's one way to do it:Net Income+ Interest Expense (Income Statement)+ Taxes (Income Statement)+ Depreciation (Cash Flow Statement)+ Amortization (Cash Flow Statement)Some investors love EBITDA. Others despise it.EBITDA does not take into account all business activities, so it might overstate cash flow.Charlie Munger calls EBITDA "Bullsh*t Earnings"Why? Because it ignores depreciation as an expense.Depreciation is when a tangible asset's value is gradually reduced over time to account for wear and tear.The equipment will eventually be replaced, so depreciation is an actual expense. This is why ignoring it when calculating profits can be a big mistake.Buffett & Munger prefer to look at EBT -- Earnings Before Taxes. This allows them to compare the earnings yield on a business to the earnings yield on bonds (which is also a pre-tax number).*****P.S. Want to level up your accounting skills? Join me for a FREE webinar on Wed, Feb 14th at 12:00 noon EST.Topic: 10 Metrics Every Investor Must KnowRSVP here:https://lnkd.in/g55kcsWAIf you found this post useful, please share (repost ♻️) to help make LinkedIn a better platform for all.

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How Companies Raise CapitalWatch these four balance sheet categories:1️⃣ SHORT & LONG-TERM DEBTPRO:- Lowest Cost of Capital- Tax-AdvantagedCON:- Paid Back on a Fixed Schedule- Too Much Debt Makes a Company Fragile2️⃣ CONVERTIBLE DEBTPRO:- Low Cost of Capital- Lower Interest Rate- Tax-Advantaged- Might Not have to be Paid Back with CashCON:- Might have to be Paid Back with Cash- Can be Dilutive when Converted to Equity- Interest Payments3️⃣ PREFERRED STOCKPRO:- Lower Cost of Capital than Common Stock- Dividend Payments can be FlexibleCON:- More Costly than Debt- Must be Paid Before Common Shareholder4️⃣ COMMON STOCK / PAID-IN CAPITALPRO:- Doesn’t Have To Be Paid Back- No Interest Payments- Lowest Risk for CompanyCON:- Dilutive, Especially when Issued at Low Valuations- Expensive if the Business SucceedsWhat's the "best way" for companies to raise capital?By not needing to raise capital at all!In other words, they are funding their own growth through retained earnings.But, when forced to choose, my preferred order is:1: Common Stock2: Convertible Stock3: Short/Long-Term Debt4: Preferred StockWhat's your preferred order?****📌 P.S. Want help understanding how to analyze financial statements?Take my FREE one-week, e-mail based course here: https://lnkd.in/gw2VvuHXIf this post was helpful, please repost ♻️ to make LinkedIn a better platform for all.

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