It has been a fabulous month. Portfolios are way up. Of course, we consider fabulous months to be just as scary as crappy months. Greed is equal in danger to fear. When the market moves because of irrational emotion, it will eventually reset. Exciting times are coming.
At Dollinger Management, Inc., we practice the art of short-term boringness, long-term profits. So what do we look at when coldly, dispassionately looking at a stock?
We start with the industry. Does it have prospects? Then we look at the strength of the companies within the industry. We look at the financial statements. When a person looks up a stock on their website of choice (such as Yahoo Finance, Schwab, etc.) there are three main statements that are normally available. Those statements are the Income Statement, the Balance Sheet, and the Statement of Cash Flows.
The Income Statement lists out the income and expenses that occurred over the time period being measured (usually a quarter or year). Income would be the money the company has earned (sales). Expenses are the money that is spent with timing differences. Accrual accounting is beyond what we want to talk about here but the basic idea is that whether or not cash has exchanged hands is not relevant. If the company has earned money but haven’t received any cash yet then it is still listed as income. If they have incurred expense but haven’t paid any cash yet then it is still listed as an expense. Income minus expenses is the profit. /span>
The Balance Sheet are the Assets and Liabilities of a company at a given moment in time. Assets are the things they own that could increase the value of their bank account. Examples would be cash, real estate, equipment, etc. They can be theoretically converted into cash. Liabilities are the things they own that could decrease the value of their bank account. An example would be debt. If the debt that a company owns is satisfied, then the company will have less cash in their bank account.
The Statement of Cash Flows tracks the literal cash flows of the company. It presents how cash moves in and moves out of the company bank account. One of the benefits of looking at this statement is that is immune to many accounting tricks that can obscure how well a company is actually doing. A company can change the other two statements by changing things like how quickly income is recognized, by writing off bad accounts, etc. Cash on the other hand cannot be modified to nearly the same extent.
With these statements, an analyst can calculate multiple ratios that would help illustrate the health of the company. A common ratio would be Return on Equity. Return refers to Net Income. Equity is Assets minus Liabilities. Equity is one way of measuring how much a company is worth. Therefore, Return on Equity is how much income a company earns relative to what they are worth. How effectively and efficiently do they convert their company’s resources into profit. /span>
If you have any questions about this newsletter, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.
Thank-You,
Daniel and Eli
As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.
If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.
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