I simplify psychology, success and money by sharing advice from mentors, expert authors and my life. CFO | Creator | Investor| Entrepreneur

Clint Murphy is obsessed with Growth: Personal, professional and financial. 

After a 25-year career, including 8+ years at KPMG and 8+ years at a leading Vancouver Real Estate Development Firm, Clint started his own Real Estate Development Company with three great partners - Frame Properties. 

Daily, he creates content that reaches over a million people worldwide across Twitter (@IamClintMurphy), LinkedIn, Instagram and his Podcast and Newsletter - The Growth Guide. 
 
He is the host of the Growth Guide Podcast, where he talks to authors, subject matter experts and millionaire mentors to understand how successful people approach personal growth, Get Sh!t Done and become financially free.   
 
Each week, he shares the Growth Guide Newsletter which provides actionable ideas to help you: 

• Live Better 
• Achieve More  
• Be Financially Free 

Clint is a lifelong learner and growth fanatic who wants to help 1 billion people live better, achieve more and become financially free.

Clint Murphy

I was 45 never invested before, and had no idea where to start.

I had a major lack of confidence, and felt like the investing game was too hard. I didn't make a ton of money and was in debt. 

But one day, talking to the investment advisor at Wells Fargo I worked with inspired me to look into becoming an investment banker. And finding a topic that excited me and filled my thoughts day and night inspired me to make a change. The Investment Advisor at my branch encouraged me with resources and to dig deeper. 

Which started me down the path of creating my own blog to help simplify finance for people. I found customers at my desk overwhelmed and intimidated by the idea of investing. Soon I reached out to Andrew, my future business partner, and friend, who encouraged me to start a podcast with him. 

Today Andrew and I help simplify investing for millions of podcast listeners each year, plus we write on our blog, einvestingforbeginners.com to help in written form.

Dave Ahern

What does Buffett look for when reading financial statements?

The book "Warren Buffett and the Interpretation of Financial Statements" gives us a few clues.

In the book he outlines each rule, keep in mind these are not set in stone.

1. Gross profit margin of 40% or higher. 

This indicates that the company has a strong competitive advantage and can charge a premium price for its products or services.

For example, both $KO and $AAPL carry > 40% gross margins at 58% and 43% respectivley.

2. Return on equity (ROE) of 15% or higher.

This shows that the company effectively uses its shareholders' equity to generate profits.

Buffett mentions ROE many times thru his shareholder letters, both $AXP and $KO earn ROE's of > 15%, with 38% and 29% respectively.

3. Persistently growing earnings per share (EPS).

This indicates that the company is a good investment for the long term.

$AXP have generated over 9.2% EPS growth over the past 10 years, this typifies what Buffett wants to find.

4. Low debt-to-equity ratio.

Indicates the company is well-versed and is less likely to default on its debt.

Look for something < 1 to start and then expand.

5. Adequate cash flow.

Indicating the company has enough cash to meet its operating expenses and make debt payments.

His version of "cash flows" refers to owners' earnings.

6. Strong balance sheet.

The company has assets > than its liabilities. 

A strong balance sheet enables a company to withstand unforseen problems, ie Covid.

7. A history of dividend payments.

Shows the company is profitable and committed to returning capital to shareholders.

Buffett likes companies paying divvies, even though he doesnt pay them himself. 

8. Management team that is honest and competent.

This is a biggie for Buffett because the management team is responsible for running the company and making decisions that affect its shareholders.

9. A business that is easy to understand.

If you don't understand the business, it will be impossible to analyze.

Buffett is famous for his "too hard" pile.

10. A business that is not cyclical.

He prefers steady, consistent earning businesses, but he will break his rules, ie. oil.

11. A business that has a moat.

Another biggie for Buffett. 

He prefers companies that can earn great returns over long periods while fending off competition. 

12. Business that is undervalued.

He wants companies selling for less than their intrinsic value.

He likes deals, and he wants to buy his stocks like his socks, on sale.

13. Business that you are comfortable owning for the long term.

Think Gillette, Hanes, Coca-cola, or Dairy Queen.

14. Don't be afraid to walk away from a deal.

***

P.S. Want to grow as an investor?

Learn how to start analyzing companies based on their fundamentals. Unravel the mystery of Nvidia, Meta, and Google.
 
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Helping Simplifying Finance | 20k+investors read our free Nuggets (see link)

Cash flow is king.

20 must know KPIs to master cash flow.

1. Revenue Forecast - Revenue y/y expected from business operations

2. Gross Profits - Revenue less COGS (cost of goods sold)

3. Operating Profits - Revenue less COGS less Opex (Operating expenses)

4. Net Income Profits - Revenue less COGS, Opex, and Interest, Taxes

5. Operating Cash Flows (CFFO) - Cash generated from business operations

6. Financing Cash Flows (CFFI) - Cash generated from financing activities (borrowing/repaying debt, issuing/repurchasing equity, paying dividends)

7. Investing Cash Flows (CFF - Cash generated from investing activities (PP&E, investments in other biz, investments in marketable securities)

8. Days Sales Outstanding (DSO) - The average # of days it takes to collect outstanding customer balances (DSO = Accounts Receivable/Revenue x 365)

9. Days Inventory Outstanding (DIO) = The average number of days to sell your inventory (DIO = Inventory/COGS x 365)

10. Days Payable Outstanding (DPO) = The average # of days to settle with outstanding suppliers (DPO = Accounts Payable/COGS x 365

11. Cash Conversion Cycle(CCC) = The average # of days it takes to convert inventory into sales, sales into receivables, and receivables into cash (CCC = DIO + DSO - DPO)

12. Current Ratio = measures a company's ability to pay short-term liabilities (Current ratio = current asses - current liabilities

13. NOPAT = measures a company's operating profit after adjusting for taxes ((EBIT (1-tax rate))

14. Free Cash Flow = Cash left over after paying for operations and capital investments (capex) FCF = Operating Cash Flow - Capex

15. Free Cash Flow to Equity = Cash flow available to all equity investors after paying for expenses, reinvestments, and debt FCFE = Operating Cash Flow - Capex + Net Borrowing

16. Free Cash Flow to the Firm = Cash flow available to all business owners after paying for operating expenses, reinvestments, and taxes = FCFF = NOPAT - Taxes - Capex

17. Free Cash Flow Yield = Measures cash flow to shareholders relative to market value FCF Yield = Free Cash Flow / Market Capitalization

18. Free Cash Flow Margin = Percentage of revenue converted into free cash flow FCF Margin = Free Cash Flow / Total Revenue

19. Free Cash Flow per share = Amount of free cash flow attributed to each outstanding share FCF per Share = Free Cash Flow / Total Shares Outstanding

20 Cash Conversion = Efficiency of converting sales into free cash flow Cash Conversion = Free Cash Flow / Net Income

***

P.S. Want to grow as an investor?

Learn how to start analyzing companies based on their fundamentals. Unravel the mystery of Nvidia, Meta, and Google.
 
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ROE vs ROIC vs ROA vs ROCE

Which is best?

In this post, we’ll dive into various "Return Ratios" such as ROA, ROE, ROIC, and ROCE. 

Understanding these ratios can enhance your ability to judge business quality and make better investment decisions.

𝗛𝗼𝘄 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀𝗲𝘀 𝗢𝗽𝗲𝗿𝗮𝘁𝗲:

1. Raise Capital: Equity, debt, float, etc.

2. Turn Capital into Assets: New products, software, inventory, factories, etc.

3. Generate Cash from Assets

4. Return Cash to Owners over Time

Owners are mainly concerned with:

1. How much cash they need to invest.

2. How much cash they can extract over time.

Less cash invested and more cash extracted lead to happier owners.

𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗛𝗲𝗮𝘃𝘆 𝘃𝘀. 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 𝗟𝗶𝗴𝗵𝘁 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀𝗲𝘀:

Consider two businesses:

- A (Capital Heavy): Needs $20 in assets to produce $1 in annual earnings (e.g., utility operator).

- B (Capital Light): Needs $2 in assets to earn $1 annually (e.g., software company).

From an owner’s perspective, B is more attractive due to higher returns.

For example, with $100K to invest:

- Option 1: Invest in A and earn $5K per year (5% return).

- Option 2: Invest in B and earn $50K per year (50% return).

Clearly, B offers better returns for the same investment.

𝗥𝗲𝘁𝘂𝗿𝗻 𝗥𝗮𝘁𝗶𝗼𝘀 𝗕𝗿𝗲𝗮𝗸𝗱𝗼𝘄𝗻:

Return Ratios generally consist of:

- Numerator: Cash taken out annually.

- Denominator: Cash put in.

Let's look at Return on Assets (ROA):

- ROA: Annual earnings divided by total assets.

However, ROA doesn’t account for leverage. Utility companies often use a lot of debt, which can improve returns significantly.

For instance, combining $100K of owner’s money with $400K of debt at 2% interest increases the return ratio to 17% (Return on Equity, ROE).

ROE considers only the equity portion, reflecting returns from the owner’s perspective, especially when non-equity capital (e.g., debt) is big.

𝗩𝗮𝗿𝗶𝗮𝘁𝗶𝗼𝗻𝘀 𝗮𝗻𝗱 𝗔𝗱𝗷𝘂𝘀𝘁𝗺𝗲𝗻𝘁𝘀:

Other return ratios exclude surplus cash to better reflect productive capital deployment:

- ROIC: Return on Invested Capital

- ROCE: Return on Capital Employed

Different numerators (e.g., reported earnings, EBIT, owner earnings, FCF) yield different return ratios.

𝗖𝗵𝗼𝗼𝘀𝗶𝗻𝗴 𝘁𝗵𝗲 𝗕𝗲𝘀𝘁 𝗥𝗮𝘁𝗶𝗼:

The best ratio depends on the situation. 

For instance, considering tangible vs. all capital helps decide based on whether future earnings will be taken out or reinvested at similar returns.

Some examples:

• Utilities - ROA
• Retail - ROE
• Tech - ROIC
• Pharma - ROCE
• Banks - ROA
  

***

P.S. Want to grow as an investor?

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Capital allocation is job number one for CEOs

How we can measure capital allocation?

Understanding ROIC is key.

Let's learn more ⬇️

We will define the formula, and inputs and briefly discuss why. Keep in mind there are a gazillion ways to determine ROIC; this is my fav.

"A company creates value when the present value of the cash flows from its investments are greater than the cost of the investments. In other words, one dollar invested in the business becomes worth more than one dollar in the market."  

Michael Mauboussin

ROIC helps investors measure how effectively management reinvests the one dollar to grow beyond the initial investment. 

As with many metrics, the higher the better, and the longer the better.  

It is one way to measure how well management effectively allocates capital.

So how do we calculate it?  

ROIC = NOPAT ÷ Invested Capital  

Where:  

💸NOPAT = Net operating profit after taxes 
💵Invested Capital = The net assets necessary to generate the NOPAT

Let's unpack NOPAT first, simplified.  

NOPAT = EBIT x (1 - tax rate)  

We can find both inputs on $MSFT's income statement, with EBIT also equaling operating income. 

💰EBIT = $83,383 million 
⚖️Tax rate = 13.1%  

$COST NOPAT = 83,383 x (1-13.1%) = $72,459  

Easy, now the fun part.

Now invested capital.  

A word first, we have several ways to go about calculating invested capital. We can approach from the operating side or the financing side. Each has its benefits, I like operating because it forces me to look deeper into operations.  

Each to their own.

Invested capital from an operations approach. 

Current assets
 - Non-interest bearing currrent liabilities 
= Net working capital  

+ Net PP&E 
+ Acquired Intangibles 
+ Goodwill 
+ Other assets  

All of which gives us Invested capital.

We can find all of this on the balance sheet:  

Net Working capital first  
+Accounts receivable - $44,261 
+Inventory - $3,742 
+Other current assets - $16,924  

= Current assets of $64,927

Now current liabilities:  

+Accounts payable - $19,000 
+Accrued comp - $10,661 
+Short-term income taxes - $4,067 
+Short-term unearned rev - $43,538 
+Other current liabilities - $13,067  

= Current liabilities of $90,333  

Net working capital = 64,927-90,333 = -25,406

Then we take the net working capital and add the other inputs:  

+Net working capital = -25,406 
+Net PP&E - 74,398 
+Goodwill - 67,524 
+Intangibles - 11,298 
+Other assets - 21,897  

Total Invested Captial = $148,711

Now we can put it all together to determine $MSFT ROIC  

💸NOPAT = $72,459 
💰Invested Capital = $148,711  

ROIC = $72,459 ÷ $148,711 = 48.7%

***

P.S. Want to grow as an investor?

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12 Accounting KPIs you NEED to know.

1. Accounts Receivable Turnover = Sales / Average Accounts Receivable

2. Days Sales Outstanding (DSO) = Average Accounts Receivable x Sales x 365

3. Days Inventory Outstanding (DIO) = Average Inventory / COGS x 365

4. Days Payable Outstanding (DPO) = Average Accounts Payable / Changes in Inventory x 365

5. Cash Conversion Cycle = DSO + DIO - DPO

6. Accounts Payable Turnover = COGS / Average Accounts Payable

7. Inventory Turnover = Cost of Goods Sold / Average Inventory

8. Total Asset Turnover = Sales / Average Total Assets

9. Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities

10. Gross Profit Margin = Gross Profits / Sales

11. Net Income Margin = Net Income / Sales

12. Operating Income Margin = Operating Income / Sales

What did I miss? Which one do you like the most? 

***

P.S. Want to grow as an investor?

Learn how to start analyzing companies based on their fundamentals. Unravel the mystery of Nvidia, Meta, and Google.
 
Get my FREE Fundamental Analysis Visualized ebook here:

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Depreciation, a visual guide:

𝗨𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 𝗮𝗻𝗱 𝗜𝘁𝘀 𝗜𝗺𝗽𝗮𝗰𝘁 𝗼𝗻 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀

Depreciation is key in accounting. 

It shows how a fixed asset's value drops over time. 

This drop is due to wear, tear, and obsolescence. 

It's crucial for businesses with assets like machinery, buildings, vehicles, and equipment.

In the cash flow statement, depreciation appears in the operating activities section. 

It's added back to net income as a non-cash expense. 

This step reduces taxable income without affecting actual cash flow.

Businesses depreciate assets like machinery, buildings, vehicles, and computers. 

These items have limited useful lives. 

Depreciation spreads their cost over these periods.

Several ratios help measure depreciation and its impact:

1. 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗦𝗮𝗹𝗲𝘀 𝗥𝗮𝘁𝗶𝗼: Measures the proportion of sales used to cover depreciation.
2. 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗙𝗶𝘅𝗲𝗱 𝗔𝘀𝘀𝗲𝘁𝘀 𝗥𝗮𝘁𝗶𝗼: Assesses the extent of depreciation relative to total fixed assets.
3. 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗢𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗜𝗻𝗰𝗼𝗺𝗲 𝗥𝗮𝘁𝗶𝗼: Evaluates the impact of depreciation on operating profitability.
4. 𝗔𝗰𝗰𝘂𝗺𝘂𝗹𝗮𝘁𝗲𝗱 𝗗𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 𝘁𝗼 𝗧𝗼𝘁𝗮𝗹 𝗔𝘀𝘀𝗲𝘁𝘀 𝗥𝗮𝘁𝗶𝗼: Indicates the proportion of asset value depreciated over time.

Depreciation greatly affects investments. 

It lowers a company's profits, increases its taxes, and reduces asset values. 

Knowing how a company handles depreciation reveals its financial and operational health. 

***

P.S. Want to grow as an investor?

Learn how to start analyzing companies based on their fundamentals. Unravel the mystery of Nvidia, Meta, and Google.
 
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Everyone obsesses over profit margins.

But they miss the ratio that shows if a company can actually survive.

It's called Interest Coverage.

Let me show you the one ratio that tells you if a company can handle its debt.

It's called the Interest Coverage Ratio.

Here's how it works.

Take a company's Operating Income. That's the profit from running the business before paying interest and taxes.

Divide it by Interest Expense. That's what they owe on their debt each year.

The result? How many times over they can pay their interest bill.

Think of it like your personal finances.

You make 5,000 dollars a month. Your mortgage payment is 1,000 dollars.

Your coverage ratio is 5x. Comfortable.

Now imagine you make 1,200 dollars and your mortgage is 1,000 dollars.

Your coverage ratio is 1.2x. One bad month and you're in trouble.

Same with companies.

Above 2.5x? The company can comfortably handle its debt.

Between 1.5x and 2.5x? It's manageable but watch closely.

Below 1.5x? Red flag. The company is stretched thin.

Below 1x? They're not even generating enough to cover interest. Danger zone.

This is why profitable companies can still fail.

Revenue grows. Profits look good on paper.

But if they borrowed too much, those interest payments eat everything.

Amazon has an Interest Coverage Ratio of 419x.

They could pay their interest bill 419 times over.

That's fortress-level safety.

Look for this ratio before you invest.

Strong coverage means the company has breathing room.

Weak coverage means one bad quarter could spiral fast.

What's your threshold for Interest Coverage? Drop your number in the comments.

***

P.S. Want to grow as an investor?

Learn how to start analyzing companies based on their fundamentals. Unravel the mystery of Nvidia, Meta, and Google.
 
Get my FREE Fundamental Analysis Visualized ebook here:

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