WB Interpretation of Financial Statements

1. Consistency

Best Holding Period: Forever ----> tax free

"Which one will still be popular in 2050?"

Consistency in earnings, low debt, growing earnings, low spending in capital expenditure, sales>>cost

Look at the 10-year period or longer

2. What to look for in an Income Statement

Net Income/Earnings - shows great consistency

Consistent in High Gross Margin = (Gross Profit/Revenue * 100) >40%

1. Revenue

2. Gross Profit

Net Margin = (Net Income/Revenue * 100) >20%

1. Revenue

2. Net Income

High Gross Margin tells about the scalability of a business meaning that the more the company sells, the
greater the profitability becomes

High Net Margin means that we are dealing with a smoothly run business
3. What to look for in the Balance Sheet

Retained Earnings - being added to or withdrawn from each year depending on the company reinvesting
its net income or not

- WB look for steady growth meaning that the company is profitable, and it identifies
good reinvesting opportunities

Return Equity = (Net Income/Total Equity * 100)

Return Equity - shows an effective distribution of its earning to shareholders but also a sign of a business
with a durable competitive advantage

Look for business with little to no long-term debt (If a company can be able to pay its long-term debt
with less than 4 yrs of earning)

4. What to look for Cashflow Statement

-shows actual ins and outs of the company's money

Capital Expenditures - money being spent on properties, plants, and equipments primarily

Capital Expenditures/Net Income (%) = (Capital Expenditures/Net Income * 100)

= should be as low as possible <25% (very good) /<50% (acceptable)

= exceptions are if a company is making a one-time payment to grow

the business

if Retained Earnings have not been growing much it might be the company is distributing a lot of cash to
its shareholder (Dividends Paid & Cash from (Purchase of) Equity)

Augmented pay-out ratio (%) = (Total Dividends Paid/Net Income * 100) or (Total Dividends (Common
and Preferred) per Share/Earnings Per Share * 100) >100% means that it distributes more money than it
earns
5. When to Sell

1. You need more money for an even better investment specially in bear markets

2. When a company may lose its competitive advantage

3. During crazy bull markets (P/E >40%)