Intelligent Investing with Financial Ratios | Greg Vanderford | Skillshare

Intelligent Investing with Financial Ratios

Greg Vanderford, Knowledge is Power!

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12 Lessons (2h 16m)
    • 1. Intelligent Investing with Financial Ratios Promo

      1:59
    • 2. Lesson 1 Intro to Financial Ratios

      18:13
    • 3. Lesson 2 Price to Earnings

      12:58
    • 4. Lesson 3 Price to Book

      11:54
    • 5. Lesson 4 Return on Equity

      12:37
    • 6. Lesson 5 Price to Earnings Growth

      8:57
    • 7. Lesson 6 Price to Sales

      20:03
    • 8. Lesson 7 Profit Margins

      21:24
    • 9. Lesson 8 Earnings Growth Rate

      10:24
    • 10. Lesson 9 Revenue Growth Rate

      7:06
    • 11. Lesson 10 The Current Ratio

      6:12
    • 12. Lesson 11 Summary

      3:51

About This Class

INVESTING IS A CONFUSING SUBJECT.

BUT IT DOESN'T HAVE TO BE THAT WAY.

Understanding FINANCIAL RATIOS is a short-cut that will save you time and energy while making the investing process easier for both the beginner and seasoned investor.

In this course, I will explain to you very clearly how to use and apply the most important FINANCIAL RATIOS in order to invest more successfully.

In short, after taking this course, you will never need to read another financial statement again.

Join the course, and learn how to build wealth through investing in a safe proven way that is espoused by luminaries of investing such as Warren Buffett, Charlie Munger, Peter Lynch, Paul Tudor Jones, Benjamin Graham, and Phil Fisher.

Transcripts

1. Intelligent Investing with Financial Ratios Promo: hi. In this course intelligent investing with financial ratios. I want to give you guys some shortcuts that will help you understand whether or not a company or a stock is a good investment just by glimpsing at its financial statistics. Now, if you do the traditional investment analysis, you have to look at lows and loans of financial statements. You have to go through lots and lots of data and compare it, and you have to understand accounting and very, very well as complicated and very, very time consuming. So if you want to be independent in terms of your investments and decision making in terms of managing over folio, that could be a very time consuming thing, which leads most people to simply hire a manager. But you have to pay that manager often times a lot more than you should. But when you understand a few of the simple financial ratios, it's a huge shortcut. You look at a few of those things, like the price earnings ratio, the price to book ratio and are we, for example, return equity? Though their view of the main ratios, you could look at a few of those and immediately dismiss a company and say, Well, this is a very unhealthy company Financially, it's not worth an investment at all. So you can really screen out most stocks very, very quickly by understanding these ratios. And then when you find some good candidates, you can start to dig deeper and look into their financial strength as well as the overall strength as a business. So in this course, I want to give you guys the ability to look at these financial ratios, understand them, and then quickly screen out the vast majority of bad investments out there is. You can focus on finding winners that'll help you build well, long term. That's what it's all about. And hopefully, in just a couple hours worth of content, you guys will have a far greater understanding of finance, of investing and of being able Teoh. Figure out what investments will build you well over time in the shortest possible amount of time. So thank you for taking the courts and we'll see you inside 2. Lesson 1 Intro to Financial Ratios: investing is very confusing subject. There's so much information out there now and you look at the news and you're reading articles that is contradictory. That tells you one thing. And then you read something that tells you the exact opposite. It's really hard to know what to do with your money. This is one of the reasons why people like Warren Buffett recommended buying next fund and you dollar cost averaging, which I'm gonna explain if you don't know what that is in the course. But another thing that can really help with decisions of how to invest your money is by simply understanding all of the main financial ratios that Countess and investors used to look at the health of a business. When you understand the ratios, the most famous one being the price to earning ratio, then it can kind of be a shortcut view to get a snapshot of the value of a business, how healthy it is, financially, how well it's doing, how well it's growing, its profits or its earnings, how much debt it has. You don't need to be a financial genius or a A C P A. To be able to look at a company and know whether or not it's probably a good investment or a safe place. Put your money. So this course is all about understanding financial ratios, especially if you have no experience with accounting. And you don't know anything about this stuff because it can really do it. Most of the heavy lifting in terms of being able to analyze a stock or an investment just by understanding a few of these key ideas. So I'm gonna go through the most probably used and most useful financial ratios, which is live. Call this course intelligent investing by understanding financial ratios built well about complicated math or financial statements. You really don't even need to read financial statements. If you have all of the statistics on these financial ratios of company, they break down all of that data and they condense it into a format that is really usedto look at, even just at a glance and basically, you know, filter out most investments by being able to look at and say OK, well, that's not a very big company to invest in and narrow it down to only a few really good candidates. So after ratios are really the key to understanding the financial health of the business and therefore a stock because stock just partial ownership in a business, it can save you enormous amounts of time by not having to carefully review financial statements. I mean, Warren Buffet famously spends 80% of the day reading financial statements and documents, and his case probably makes sense because, you know, he's a genius, and he's, you know, this amazing savant added at investing, and he picks out all kinds of information, and he loved doing it. But for most of us, don't have the time to do it. We don't really want to be full time investors, but we're investing some of our families, money or all of our capital. We need to have some way of making sense of where would you put our money. Besides just reading articles that contradict each other, you should be able to make your own judgment based on what you see in the financial statistics of a company by reading these ratios. So I'm just gonna give you guys a lot of information about with ratios mean when they're good or bad and how you can get sort of holistic picture of the help of a business in a very short amount of time. I mean, they're really easy to understand that supposed to many financial terms of formulas that are confusing and that, you know, almost designed to be confusing because, you know, if you have an industry built around all this complex, you know, uh, acronyms and words and vocabulary and things, then you need to pay people to explain that to you or paying people to invest your money because it makes it very mysterious. The industry wants that. They want you to pay them a lot of money, demanded their money for your to give you advice. But really, it's not that complicated or above. It says that you know, investing is simple, but it's not easy. It's not easy, mostly because, um, the key skills involved our discipline and patients and self control rather than being some sort of a mathematical genius and being able to predict what the stock market's going to do . Actually, research shows that it's almost impossible. Even Warren Buffett himself, and it's part of Charlie Munger say you have no idea what the stock market's gonna do in the short run, totally unpredictable, is too complicated. And there's too many variables because it's a complex, adaptive system, too many variables. But the reason that they can consistently make money over time is that they're not trying to make predictions. All the doings, looking at the health of the business, analyzing that individual company and the financial position, their sales there had advantages that brands etcetera, etcetera and then buying at a time when the value seems really good. You know, it's not that complicated. If you by blue chip stocks. For example, when they're trading evaluations that don't appear to be all that high, you're gonna get an adequate result. An adequate result in investing over time leads to independent wealth basically the definition of investment investment used by a Benjamin Graham who was Warren Buffett's mentor and the person who is considered to be the father of so called value investing to find investing as safety of principal and an adequate return and what we've now sort of changed. Investing into in the public mind is more like speculating or gambling. You want to get the highest pictures possible, the shortest amount of time possible, and that pretty much leads to us taking a lot of risks and not understand its understanding fully, really, what it is that we're doing. So understanding financial ratios help us understand what it is that we're doing, and they sort of act of the shortcut Teoh reading financial statements and things like that . So some of the key factor rations that we need to understand our the P e probably hear people talk about this a lot. That's a price to earnings ratio. This is the main thing that people look at when you want a value of business, whether it's with the stock market or private business. I mean, you're gonna, let's say a by a small company like a restaurant, and they make $100,000 a year in profits. You will do a price to earnings that is some multiple of that annual profit, so that business earns $100,000 and, uh, you think that that's pretty stable. If you can grow earnings a little bit, maybe will stay the same in a reasonable valuation for that business to a private owner, not on the stock market, that stock market prices are inflated because of the quantity, which we'll talk about it later. But you might pay somewhere between, you know, 305 $100,000 for that business. A business that produces $100,000 of profit is worth a few times its earnings. So the P E might be, let's say, five. That would be a reasonable PD. You maybe could go up to something like 10 and pay a $1,000,000 for that business if the profits are growing. If you see over the last three or four years their earnings have been going up by 10% every year consistently, you can speculate out, Calculate, I should say out in the future up in a few years it's going to making, you know, $200,000 a year. So this business is going. It's worth a lot more, so I'm willing to pay 10 times earnings. In that case, the price to earnings would be 10 10 times earnings. There's different ways that we talked about this. That could be confusing for someone who is not used to it. But we talked about the earnings multiple the price to earnings or how many times earnings that were willing to pay an earnings here means profits, so that's all a P E ratio is. But in the stock market, the PS are usually higher because of the liquidity and how easy it is to buy and sell stock . Right? You're having a fractional ownership in a business as opposed to you by a private company. You know, it's very less, uh, liquid. So trying to find someone to buy your private business is very difficult compared to dislike being able to buy stock and so that liquidity usually makes the price to earnings much higher. But also usually the stock market companies on the stock market are leading companies. They're there for a reason. They've been very, very successful past that they have dominant positions in many, many cases. So you have, you know, companies trading at 50 times earnings or 70 times earnings because they're growing their revenues 30 or 40% a year or whatever. So it gets a little bit complicated when you're trying to value companies that are growing really fast at the point here is that we're gonna be a little look at these ratios and give yourself a good idea about what a company's work and how much that we should be paying for a stock or any investment or not. So the P E is the most popular. One is the most useful in general because it tells you how much money you're paying for a company's profits or earnings. Okay, PB is price to book. This was used a lot more in the past because the nature of business used to be a lot more based on things like real estate, property, plant A and equipment and those type of tangible assets. And the book value price to blow compressive book value is the value of the company's assets, minus all of its liabilities, like debt and accounts payable things like that. And so you have this sort of tangible value of just what the assets worth and a good example this to be like, How much is your house worth, right? If you have a house of your real estate, as were $200,000 let's say you own it free and clear, you have no mortgage than the book value of your property is $200,000. Now, if you rented that property that you didn't live in it. Almost no, you would have earnings right. You would have the rental earnings from that property, and you can calculate the value based on book value plus rate. The earnings rights. You know you have a P E for that house. You know how many times earnings is it worth? And you have a price of book. How much is it worth objectively, in terms of the tangible asset? So we apply this book value to a company just to see how expensive the market is pricing it , based on his tangible assets, that the P is based on profits and the PB is based on the value of the assets and the reason that the PB could be really important, because sometimes stocks because of pessimism or conditions in the market, they might actually be trading at a market cap that is lower than the value of the book value. The price of the actual tangible assets less liabilities not to be a very, very like, low risk investment, because even if the company were to go bankrupt for some reason, they would have the assets to pay off all the investments in all the investor than still make a profit. This is one of the things that Benjamin Graham made really popular back in the Great Depression days in the 19 thirties, when this doctor Mark, was treating like a very, very, very low valuations due to the huge bubble that burst and do horrible economy. He was just looking for businesses that were trading below book value, knowing at some point he was gonna make money on that because the actual value of the tangible assets is literally Mawr in the stock market is giving it credit for So that's a crash course in price of book. But they're both valuable metrics, we'll note. So price to book of one means that stock price is trading at the same value as the tangible assets of the company. And so usually you'll be paying some multiple that maybe it's three or four, and an average company these days and a P E might be 15 or 20 for an average company These days, we're gonna go in tow the differences in these numbers based on different industries and detective companies and things like that. But these are the main ratios. Okay, return on equity is like an efficiency ratio that tells you how much money the company is making based on the value of its equity. So equity includes the assets as well as as leverage. That means debt, because you'll have a lot of equity and visits like a company borrows, um, you know, $100,000. It has that equity to use a cease fit, but it also has debt, so equity includes debt. But if you have a lot of liquidity, we have the ability to raise large amounts of money like, for example, a good examples. Tesla. You know, it must uses a lot of debt and a lot of different creative types of financing to accomplish his mission of creating electric cars and doing other things like solar panels and whatnot . So the company has lots of debts and everything, but it has a lot of equities using that money that was raised to create value. It's highly leveraged, so when we look at it, are we we want to see The company is using this equity efficiently, and so the price for reasons that profits the price of book. Here's a look at assets and then the China equity looks at efficiency. How well the company using its capital and a good return on equity might be about 15%. Let's say something between 10 and 20% is good and lower than 10%. It's just not that efficient. You think it well, then they don't seem to be getting much bang for their buck in terms of how much capital there they are raising. So we're gonna get into those things. Of course, throughout the course, another one is called the current ratio. This is the ability of the company to meet short term cash needs. So the current ratio if it's, ah, blow one that I mean that the country doesn't have enough cash and there are risk of running out of money, not good. So this helps you to measure cash flow. Companies need cash. It's kind of like the blood, the life blood of a businesses have cashed. So someone's coming. I have a lot of debt, but if you have a really good cash flow, it's okay. Like tobacco stocks, tobacco companies, they're usually highly leveraged because their revenues are very, very predictable. People are addicted to tobacco products, and so they can have tons of debts, and they know their incomes really stable, and so their cash flow is really good, whereas other companies maybe are seasonal, and they make most of their money. That said, like a chocolate company like a See's Candies, they make like 90% of their money during Christmas. And so their cash flows are really they're predictable, but they're very, very lumpy. And so a current ratio will just give you information about how good a company's cash flow is. And that's something that will tell you about the health of the business as well. Obviously, we're gonna talk about that. Another really good ones. The price to earnings growth. This is made famous by Peter Lynch because he, uh, totally outperformed the market just blew them away when he was running his fun in the eighties and nineties. And this tells you how how fast the company is growing and in terms of relative to how much earns you're paying for. So it's like a P E P tells you what earnings multiple you're paying for, but the PG, the price to earnings growth tells you how much you're paying for the growth in earnings. So it's a really useful tool, and basically you want to invest in a company. Hopefully, that is growing earnings as a P E G ratio one or lower, and that means the company is training at a relatively low price in the stock relative to have fast. It's growing. So all of these different data points tells you something really important about the business so you can get a snapshot. Maybe if you could just tend financial ratios and understand a lot about the financial aspects of the business. And whether that is a healthy business now doesn't tell you if the company's gonna be thriving five years, 10 years from now. But you know a little more research in the qualitative aspects of the company, things like it's brand like, for example, you look at a company that Coca Cola or Nike or Apple have very strong brands. If you if you look at their ratios and you see 10 really strong financial ratios and then you know that those air leading old blue chip companies, the odds that you're gonna lose money on that investment over time, are very, very, very low. And so that's what kind of looking at. We're trying to look at probabilities based on the financial health of the business and other factors and try to get an adequate return on our money. It's actually not that difficult. I think it's simple. It's just that it's hard department messing. It's hard is dealing with market fluctuations as the stock market goes, ups and downs and ups and down. And it's it's very volatile, very difficult to stand pat and just, you know, let your money flush like that. You feel like you've lost money when it goes down, as you might get excited and feel like you made money when it goes up and sell when you should have just held. So we'll talk a little bit about that kind of stuff, too, because it's really important as well. But in general, this course is going to focus on the value understanding these financial ratios. So another one is the revenue growth rate. You want to look at how fast sales are increasing, so there's a price to sales. Um, and that's gonna be something that rapidly growing startup might be unprofitable. It might be losing money, but if revenues or sales which are the same thing, are growing at 100% per year. A stock might be going through the roof because the future looks very, very bright. And a lot of the greatest fortunes have been made on companies that lost money for years and years. Amazon being the biggest example. But stock just went through the roof because they were taking so much market share and they were growing their sales so much. The company was getting huge even though it wasn't after turning a profit. Was taking all the money that was making from its sales and reinvesting it back into growth . And a stock market likes companies like that. So looking at the revenue growth, it's really useful thing, especially if you want invest in that type of, ah, sort of aggressive style. And then obviously profit margin is really important to so like, you know, the opposite of what I just described. A company that reinvests all of its profits into the business might have no margins, but it grows fast. Then you might also have a company that has slow or low or no growth at all, but because it's highly profitable as really high margins, Let's say 40 or 50% profit margins year in and year out, and it's not a very stable, strong position in the market. That might be a really good investment, even though it's not growing. It has this cash that is producing from its operations that can be paid back to you in dividends that could be reinvested into other companies and other businesses. Or it could buy back its own stock and reinvest the capital back into the company by boosting the per share price of the stock. And buybacks are kind of controversial topic because it could be really, really good for investors and the market if they're buying back at low prices. And they could also be valued a strong if you're over pain when the company is buying back its stock to high price. So buybacks kind of controversial. People see them as a way of not using the capital to for production, but they can actually be really adding a lot of value to the company into of the economy. If they're done well, sweat where Bubba is a huge fan of buybacks as long as they've done intelligently and we're gonna talk about that A little bit of class, toots, because, you know, I want to give you guys as much information as they can. Even though the course is mainly about these financial ratios, I'm gonna give you guys sort of a crash course in just all aspects of the stock market and intelligent investing. Um, while you're here. OK, so first we're gonna look at the most widely used a ratio which I already introduced to you The P E ratio. 3. Lesson 2 Price to Earnings: so it's hard to explain a little bit. The press earnings tells us how many times this year's profits or earnings that we are paying for. It helps us calculate the value of businesses also known as the earnings Multiple. What earnings Multiple. Are you paying for a company? A rapidly growing company will pay a higher multiple for that company. So it really fast growing software business that is low. Cape X Capital expenditures my train for 30 times earnings like Google, for example. And so you'll pay higher, higher price for Google stock because it consistently grows its earnings year in and year out, whereas, you know hang 30 times earnings or a P e of 30 by be considered really high. If a company is not growing its earnings consistently, we might look at a company that has stable earnings but isn't growing them. Maybe pays a dividend, maybe their P E ratio with more reasonable around 10. Okay, you look in a lot of the automotive companies like Ford and GM. They're all training it really low. PE's right now like 678 times earnings at their earnings multiple because they're slow growth or they're not growing at all, but because they're stable businesses that have been around for a really long time. Um, we know that if you invest in them since they usually paper to get dividends, you know, anywhere between two and 4% of a dividend and cash back to you even if they only appreciate at, you know, three or 4% per year plus the dividend, you're gonna get a pretty good return on your money and is considered to be like a safe conservative investment. So sometimes we want to invest in companies that low PE's because it's considered safe and less risky. And we're happy to get a lower earnings that is kind of, you know, guaranteed. Whereas other people that are more adventurous I would be more aggressive. Or maybe some books, because they're younger and have more time to make up money that maybe lost, they want. Oh, invest in high growth, high earnings. Multiple stocks on baby get much better results, but with added risk. So your investing style is going very depending on your age and your risk tolerance. It doesn't bother you to see a lot of fluctuation in the value of your assets and you should probably more best. Because if you intelligent, if you best intelligently and aggressively you could make a lot more money over the long term. Just know that you are risking your money and might be uncomfortable a lot of time because there are inevitably going to be bear markets. If your disposition is such that you just don't like risk and you don't like volatility, then you're gonna want pick safer investments. Or if you just closer to retirement, it makes sense to buy conservatively capitalized businesses that pay dividends because you're looking for income and you don't want a lot of fluctuation. You don't want to risk your money crashing in a bear market really hard. Whereas those high growth companies they go up faster. They also crashed harder during a bear market, whereas a company like say, uh, Coca Cola that pays a three plus percent dividend and is, you know, one of the oldest companies in the world, it's gonna be considered a much safer investment. That's not gonna be growing rapidly. But if a bear market happens, people are still gonna drink Coca Cola, the company still gonna be paying you with dividend, and even though you might have some depreciation of the asset stock might go down. It's not gonna go down as much as a high flying growth stock. So that's where the PD ratio comes in. Looking at. You know what, what multiples? Reasonable for what type of company. And it's also a way of thinking about, like, how many years with taking your money back, right? So if you invest in a business and the multiple is 10 you're paying for 10 years of earnings, right? If a company's making a $1,000,000 a year and the market cap or you have a market cap is $10 million when you buy that stock, it doesn't matter what the share prices people get Really confused about that, too. Think, Oh, cheap stocks, trading at $10 per share or expensive stock is treating it $1000 a share. That's totally irrelevant. It doesn't matter what the per share prices, what matter is what is the the price to earnings. Okay, so the whole market cap, the whole value of the company is divided into shares and depending on how many shares there are, and depending on how much that stock has grown or not. You're gonna have a per share price, but don't be confused by the per share price Google trades at, like $1000. Uh, orm or right now, um, per share. But that does mean that it's expensive. I mean, it depends on how much you're paying for the earnings for the market cap of the company and the profit that's making. Okay, this is why we use the ratios. This is why we use the price to earnings. Don't get stuck on the share price. A. A stock that's trading at $10 per share could be very expensive. And stop this training it. $1000.5000 dollars per share would be very cheap, depending on the value you're getting for your money. So I hope that makes sense. That's why we use the ratios. What is the price you're paying for the earnings, and how long would it take you to get your money back if the company were were growing in a certain rate, or even if they if they were not going right, So the company's making a $1,000,000 a year? It didn't grow at all and just kept making 10 million are making a $1,000,000 a year and you paid 10 times earnings. They would take you 10 years to get your money back. And then in theory, after that, 10 year all of the earnings would be profit. Right? So you got to think about investing the same when you think about buying a whole business. So it would take 10 years to get your money back from your original investment and that everything after that would just be pure profit. We call that an infinite return because you already got your original capital back, and now you're making money off of that original money forever. And this is why you know, business is the best way to get Richard to build wealth. Because if you go work at a job even if you're a doctor, you still have to work the hours and then you get paid a salary. Maybe they're high salary, but only in business and investing can you get this type of returns that go on forever or grow forever in some cases. So business is the way to build wealth and jobs or away Teoh you know maybe have a stable income or whatever. I sort of have, like a what used to be a guarantee, right? You guaranteed probably 10 2030 years of a career at a certain salary. You just did your job. Now you know it's not even the case anymore that you have that much job stability, depending on what industry you're, and so the worse. And so investing has become, like even more important, understanding entrepreneurship. Business investing was probably be an evermore important skill. As the world becomes globalized and jobs get automated and society continues. Teoh change very, very rapid. So these are ways we think about the P so already gave you the example Company with a $1,000,000 in earnings and say they have a market cap of $5 million. That means the P E is five. It's trading at five times earnings, right has a $1,000,000 a year on earnings and its trading for $5 million. Whatever the per share prices is irrelevant. It just depends on how many shares are on the market, right? So in this case, you know, if there's five million shares, that means that it would be $1 per share, this fine line shares, and it's training a PD of five as a $1,000,000 earnings give you $1 per share. That's just that's only it's all you do simple math. And, um, so just look at the ratio. Don't get caught up on how many shares there are snow that the PES five you're paying five times one year's earnings. That's the way we think. But, hey, this is instead of very low, very conservative evaluation for a publicly traded company, you know, anything over 20 is generally considered to be high, as already explained. Depends on the business in the industry. Fast growing service business of software company may trade at over 20 and maybe that's not high because of how fast it's going. If a company's treating it lower than five, that may actually be risky. It's a really, really bad business that's going out of business, so these just guidelines give you an idea of what is generally considered good or bad. You're five is low twenties high. Anything in between that is pretty average, pretty normal now. It might be a great investment to buy a company at 10 or 15 times earnings. If that company is ruling consistent earnings grower as a print brand has great management as cash has good profit margins. Right. So this is what all these ratios tell us, and basically, to try to make it simple, you just look at all the ratios, and then you get a holistic picture. Okay? Profits good. Growth is good. It is good. That too bad problem. Are you okay? It's almost that's good. So it looks like a good investment. And then you simply put your money in hoping for safety of principal, an adequate return that you're virtually guaranteed to get if it's a strong company and if current results continue and you know that the results will continue. If you're buying a business like Coca Cola has been around for over 100 years or a company like Nike, it's been around for a really long time into superstrong brand. As long as you're not over paying for those shares, right? You know that cup is gonna be around. He knows to continue to make money and frustrating at 10 times earnings. The odds of you losing money really low, especially if it's, uh, paying a dividend, right? That's the way to think about it. If you're buying a company that's a super fast, high flying growth company, and the assumption is gonna keep growing actually small well, it's it's much more difficult to value those companies, and that's why you're kind of gambling. When you do that, it's really risky. You would've bought Amazon in the 19 nineties, Helen. You're stopped for 20 years. You'd be fantastically wealthy. But nobody knew that Amazon was gonna turn into the giant it is today because it was losing money for years and years and years and years. So very, very difficult value that some people said You're crazy to buy Amazon Stock Unit was all your money. You're crazy. And indeed, Amazon stock was very volatile. It was way, way up, way down in the stock market crash in 2000 and then of the ministers kept growing and growing growing and the stock over time it went up by fantastical proportions. But it's very difficult to predict the future, which is why people like Warren Buffett recommend buying stocks and companies that are traded at lower multiples. It's just less risky, and it's easier to value. It's easier to value Coca Cola that it is the value. Microsoft, for example, a software company in the technology space, has a lot of change going on in the marketplace due to new technology being developed all the time. But you know, there's not a lot of new technology coming out in the software business. Coca Cola is the reigning champion, and there may be a new competition right now. The challenge, the Coca Cola is that people are going into more health conscious type products. People are becoming more health conscious, I should say, and they're drinking less sugary beverages. That's a challenge for Coca Cola, but they have all of these profits that they that they still make them from their main product. They're made culturing and take those profits, and they reinvest them into other drinks into new companies. They acquire other businesses. They might invest in coffee that might investment you, water company, right, Coca Cola on some water companies so they take their profits and they reinvest them so they're still growing. Even though people might be drinking fewer units of the original Coca Cola Classic recipe, they also pay a dividend so You know, that type of a business is just generally easier to value unless risky. You also will probably get lower returns, but it will be like a higher probability ever turn Hope that makes sense for some of you of this stuff is all knew it might be kind of confusing, but, you know, you can listen to these videos as many times as you want and go from there. So focusing on the price of an individual share of a company is meaningless. Already talked about that. P is what really matters. Most people misunderstandings. I talked. A lot of people who go the stock soared, spent $1000 a year, and I mean that. I mean, as long as you have $1000 to buy the share, it doesn't matter. I mean, if you only have a little bit of money to invest in, you can't afford the higher price years. Well, then, that's another issue. That means a year just, uh, limited to what stocks you could buy into. But most companies trade, you know, for less than $1000 a share of the vast majority trade for less than $100 a share, so you're not to limit on what you could buy. And then what happens to most companies when their shares get really expensive on a per share basis? That they will split right so the company could do a stock split, simply double the number of shares outstanding? Um, and all it doesn't make it so. It's easier. People buy shares taken by smaller, fractional shares of the company that divides the price of one share in half. But the market cap remains unchanged, so stock split is nothing. Fancy this. Basically, they cut in half the value of a share and issue a large number of shares so that people could and by him. So are fictional company, with a $5 million market cap that have a 1,000,000 shares outstanding. Would be trading at $5 a share instead of 10 if it had fewer shares. But they were trading at a higher price for share. You know, it wouldn't change the P year anything, so it's just something to think about and next one look at the price to book value 4. Lesson 3 Price to Book: so the price of book tells us how it spent to the stock is relative to the value of its assets minus liabilities. Sometimes the stock trades at less than its net asset value. This is kind of amazing that some some people who haven't studied business, they think, How is that even possible? But it could be three number of reasons on the popular pessimism around the business, only thinking maybe the business is facing an existential threat from editor. Maybe it's just got so much debt that even though it actually has, um, a net asset value that is still higher than the outstanding stock price, people just don't see a bright future for it. And they're worried and somebody's. That worry is correctly placed, and you should stay away from the stock even though it's training lesson book value. Other times, however, the worry is misplaced, and the company is in a much stronger position than people think. And this is what makes investing so interesting. Right, if you can find a stock is undervalued, are trading at less than its book value, but it shouldn't be. Then it makes it. It's a big investment opportunity and This is what comes in. This is when the, uh, the theories of investment and finance come into play. There's something called the efficient market hypothesis, which basically says that nobody can outperform the market because the market is 100% efficient. As information about companies and businesses come into the public sphere, there are so many agents that's you and me investors that are acting on the information that the market is totally efficient. But obviously this this is wrong. It's not totally true, because if that were the case, no one can outperform the market. People like Warren Buffett, Peter Lynch. Others have proven that you can outperform the market over long periods of time. It's not just luck, and the reason is because the market actually is quite efficient, but it's not 100% efficient. It takes time for data to be correctly allocated in the market over time or, in other words, as put by Warren Buffett and and his mentor, Benjamin Grant. In the short term, the market is a voting machine, but in the long term is a weighing machine. So in other words, in the long term, the market is very efficient, but a short term, the market can be very inefficient, which is why it fluctuates so wildly and which is why it's so all. And a lot of people have to miss perception that the market is risky and stocks are just gambling. Because, you know, you put your money in there, what a crash comes, you lose your money. Oh, no, that was a stupid thing to do. But that's a misunderstanding of what investing is. Investing is studying a business, making a calculation after his value, buying it when the value is good and then only using money that you're willing Teoh lead in the market for long periods of time. Investing is, by nature, a long term activity. If you are buying and selling stocks within, like one year timeframe, that's not investing. You are trading. You're trying to time the market, buy and sell and make money off of the arbitrage of prices going up and down. And that is very, very risky. Day trading or just trading in general is inherently risky, speculated. It's gambling and maybe you're really good at it. People think that they can read the charts and guess what's gonna happen and they make money that way. But that's not investing, Okay, so we need to find those terms. Investing is being willing to have your money invested for at least a year. Even that in the investing world is a short time frame or above. It measures investing results in five year minimum time frames, right? The amount of time that it takes for the world to go around the sun, right? One year, um, is a very arbitrary amount of time to measure business performance. That's a warm above it says that, he explains. That's why do we measure business performance in annual terms? Well, we're used to measuring things that way, so that's what we do. We want to see, you know, earnings reports and want to see how well businesses are doing. And, you know, three month time periods, which are called fiscal quarters or in nearly time periods, but the amount of time it takes for investment. Teoh give you results or for a business to grow, you know, it doesn't necessarily need to be specific time like a year or two if a business is not growing and the stock is not going up after a few years, then you have a problem. You probably made a mistake. You want to sell those shares and reinvest your buddy. Call this rebalancing your portfolio, but you have to wait a few years to see what results you're going to get. A really good example I've seen recently of this in action is Disney Disney Stock. For three or four years in a row, it was basically flat. People worried that, um, profits from ESPN, which does he owns and which was a cash cow. They were going down because of cord cutting. People were leading cable on foot solution over toe online. Um, options. Netflix. Things like that, and Disney stock prices stagnated, but they were investing in the future. They were investing in their own online platform, do the plus, and they were making huge investments into their new attractions, like the new Star Wars Land Galaxy's edge, um, new, um, avatar land and lots of other big investments they were making. They opened a huge Disneyland resort in Shanghai and China, but anyway, the point is that stock of it just was flat, like three or four years. So if you're sitting there holding Disney shares Your thinking, man, I've got no results in all these years, I should sell this. But all of a sudden there is a lot of optimism about the company, and results were starting to show from all of these investments. And the stock went up 40% in just a few months. And so if you average out that 40% gain over three or four years, you're getting a really good result, and that highlights and nature of the stock market, it may be flat or go down, but then you may have a year. Work goes up 30 40 or 50% and you want average out those results. And so if you get an average of nine or 10% compounded per year, you're going to be building a lot of wealth. You're gonna be getting very, very good results. See, people misunderstand the nature of the stock market. You have to look a long time frames. And this is why, if you look at, like 100 year timeframe, the S and P 500 index the average stock market total index, it averages around 8 to 9%. I was lying and people like Warren Buffett advocate. Most people should just buy stock market index fund and by the average index of the S and P 500 companies, and they're gonna probably get around eight or 9% returns over long period of time. It's not guaranteed, but that's what's happened in the past, and you don't to make any decisions at all. You just take money that you say and you buy the index, and you should get an adequate return. By doing that, you want to do a little bit better than the market, which will make you 100 of thousands or millions of dollars more over investing lifetime. You can outperform the market by you one or 2% points. Then we need to learn how to invest on your own. And this course about financial ratios is one way to help you guys learn how to do that. Okay, so, um, as already mentioned in the intro press, the book of one means that the market cap of the company is equal to its total value of net assets. All assets minus all liabilities and that's considered to be very, very safe doesn't mean that in a market cap is equal, do the company's assets and stunning and counting any of the company's sales or profits. So I mean price, the book of a company of one, and it's very probable that makes it look really cheap on I would wonder, why is it trading at such a cheap valuation? And then you got to investigate a little bit to figure out why people are pessimistic about the business. It might be due to the competition, like I already said or other factors, but oppressed a book of one in a profitable business. This may mean that there's an opportunity to buy that stock, and it's probably gonna go up. It might mean that the market is pessimistic. I mean, we see a rising tide raises all boats or is it a stinking tide lowers all boats much, sure, but the point is, when the stock market goes up in general, almost all stocks will benefit. The same is true. When the stock market goes down, almost all stocks will be punished. But obviously the strength of all businesses is not state. So a lot of times in the stock market goes down, you will have opportunities to pick up really great value in companies that are good, but their stock price is training at a much lower evaluation that it should be. Just because you're a bear market or the economy in general is not doing very well. That's when the best investors are most active. In 20,009 Warren Buffett, Charlie Munger They were most active buying businesses when everyone else was selling in. The market was depressed because they understood this, that you could buy great businesses at huge discounts because of pessimism or because of the economy being in a bad way. And then as things improved, stock will go up and it will go up a lot. They've got to buy a whole railroad for pennies on the dollar. They bought Burlington Northern Santa Fe Railroad for way less than it was worth, and they made a huge amount of money on that. They invested in all the banks. When it was clear they were going to be saved, they were trading at two or three times earnings right at a P E ratio by two or three times . And of course, there were almost the only people who could do this because they're very smart and they always keep a lot of cash. So with stock market was going up, things getting more expensive, they were hoarding cash and then the stock market crash. They were almost the only ones around that had all this liquidity. And so then they were just saving companies looking right, getting believe in terms, on deals, buying stocks at super low valuations. You and I don't have to be geniuses to mimic that. Behavior of the general rule is if you're gonna be investing on your own and not following the dollar cost averaging into an index strategy hoard cash markets are going up because it means that they're getting more and more expensive. And when markets go down buying more stocks because it means they're cheap, which, of course, is the opposite of what most people do. And it's the opposite of what the financial of professors and textbooks tell you to dio. But it is actually turns out to be the way you make the most money in the stock market, but we're getting into another realm. That room was called behavioral finance, and it has to do with psychology of investing and making, like buying and selling decisions. I want to try and stick as much as possible that can do the financial ratios, which is what this course all about. If you want to learn more about, there's other aspects of investing. I've got other courses about the psychology of investing, behavioral finance and other aspects of investing in none of the stock market but real estate as well. So companies that sell services they usually have a much higher price to book value because they don't have as many assets. Their assets are intellectual property. So you've got a software company or a service company. Their price. The book might be 10 or 20 or something like that because they don't have very much real estate, and they don't have very many assets that air tangible assets. So that shouldn't scare you away. Used to understand the nature of different businesses. So, you know a company that sells a lot of a heavy equipment like caterpillar or something, they're gonna have a lower price to book or a bank. Thanks have much lower prices to book because banks are holding all of these deposits from all of their customers right and so on. Banks also, usually you're highly leveraged. That means they have a lot of debts, which is the nature of the way that banks are. Structures eventually usually trade at P PB ratios between one and five. That might be typical, whereas a software company might be trading at a PB ratio between 10 and 20 and that's okay . So you just gotta understand. The nature of the price of book ratio is based on the company's assets, and some companies don't need to have a lot of tangible assets. Software companies are, for example, other companies need and by definition, have a lot of assets. Banks are a good example of that. We have more property to have a real assets cash, etcetera. So it's important. Understand the industry that you're investing in support, understand a company that you're investigates. So, um, that sort of a crash course in the price to book ratio and at least you guys have an idea about what is used for and what it is next, we're going to look at the efficiency ratio. We are away another very, very important 5. Lesson 4 Return on Equity: So they are always really important because it tells you how well a company is using his capital. This is, I mean, this is super important companies. Is there to make money? And when it does make that money, if it's been successful in its producing profits, what it chooses to do with that capital is paramount to its future success. So I give you an example earlier about Disney and it re investing a lot of its money between the stock kind of language for a while. But then when it started seeing the fruits from its its labor, but only the stock pop and start to go up really high. But you know, Disney was investing is long term future 10 and 20 years out by having the new streaming channel by having these new, really popular attractions at Disneyland and by building new resorts. I mean, those are long term things where it's gonna reduce the short term profits because you're spending more money on on the business, you know, on future growth. But if you want to invest in companies that you can buy, and then just forget about, that would have been a really good example, Disney's gonna be probable for a very, very long time. There's no way to know how probable, and there's no way to know what return you're gonna get on your money. But if you look at the return on equity and you see that it's making 15% or higher, that's generally speaking an efficient use of capital. They're allocating their profits well, and so you know anything less than that. You might question that the decision making of the management and so they are away is actually good measurement of the management of the business. Warren Buffet talks about how a lot of CEOs rise through the ranks because of their skills and things like marketing or maybe a lawyer or engineer, or maybe even institutional politics sometimes. But the number one most important skill, which most CEOs actually don't have, is capital allocation and Warren Buffett. I mean, the reason he was able to build one of the biggest companies in the whole world based purely on investing. All Berkshire Hathaway does is reallocate capital and bias companies and reinvested earnings from those companies into other businesses. Because that's what Warren Buffett does. That's their business model it's an investment business model. And so he recognizes uniquely how important capital allocation is on people to hold business around just out. One thing. But most businesses and most CEOs actually haven't been trained to do it very well. Which is why you see a lot of a failed mergers and failed acquisitions. They think, Oh, well, we have $10 million in property or in profits. Excuse me, let's acquire some other businesses, and that may not be a smart thing to do. What you use that capital for is very, very, very important. And it's a Jew in our personal financial lives as well, right? We can learn a lot by watching what companies do. And so when you just managing your own personal finances for yourself in your family, you know, if you have AH $1000 in earnings from a job or from your small business, you know where you put that money is really important because limited right money is a scarce resource. And when we look to allocated for long periods of time, we want to get a good return on that, and we want to do it without a lot of risk. And so the return on equity tells us whether management is achieving that. Well, we're not OK, so it's a really, really important one that that Buffett emphasizes a lot. He even looks at return on equity of being more important in many cases than the price to earnings, because earnings tell you how much money you companies making, you know, right now or this year. But the return on equity, especially over time, tells you you know how. How well is the company allocating capital? That will give you a good idea about how long into the future The company will probably continue to make money because of its, if its operating efficiently and effectively. That bodes well, and if it's making a lot of money this year, but it's got a really low return on equity, it means it's inefficient. And it just doesn't bode well for the future, even if they're really profitable right now. So I hope that makes sense to you guys. So it's also important to look at the company's debt levels. You might have a really high r o e, but it could be because the company is very heavily leveraged, right? If a company borrows $10 billion at $10 billion in debt, obviously, but they can use that $10 billion for growth. And for really valuable things aren't used the example of Elon Musk and Tesla. He uses a lot of debt. And a lot of you know, investors don't like that. You don't want to see a company using a lot of debt because this is gonna pay interest on that debt, and at some point, it has to be paid back. But that leverage is being used well, because being used or efficient growth, then it's okay, right? So you just gonna look at that when you look at a high, are we? It could be because the company is very highly leveraged. If you have a high, Are we on a company that has load that levels? And that's really, really good. That means the companies making a lot of money based on how many assets are, how much equity it has. And so let's say you have a company that they got in our way. But four years, 50% which you will see sometimes, and it has load that levels that might be a screaming opportunity to buy the stock. And again, there's lots of reasons why a stock may not be trading at what it's actually worth. Sometimes small cap stocks meeting small companies. Artists are overlooked because people don't know about that. I mean, a famous company like Facebook, apple or Amazon or whatever. Everybody knows about those companies, and it is analyzing them to death. And so they tend to trade at a fair value or close to the right value because they're being looked at so hard. But a really small company that select trading for you know it's on the net worth of $1,000,000,000. Or maybe even, uh, you know, $100 million as a tiny stock in the stock market. A lot of people might not even be aware of that company, and so it might be trading at low, multiple and way cheaper than it should be simply because it's not being analysed much. I might be a big opportunity for you if you make a couple good investments in small companies, and then what they do start to get noticed because they are growing and they have really healthy financial statistics and good businesses then you could make a huge killing on that type of investment over time. Again, the caveat here is always that it takes time to make money off of these investments. You know, Warren Buffett says, you can't produce a baby in one month by getting nine women pregnant. Some things just take time. I really like that analogy because it makes it. It shows me that investing is also like other things in nature. It takes time for a company to earn profits under profits to increase, and therefore it is logical that it takes a certain amount of time for a stock to go up in value because it's only going up in value because of the prophet says. Maybe this is why investing in stocks and real estate so different things like buying gold or Cryptocurrency or even commodities, because there's no way to really value what those commodities are working. What is an ounce of gold work right now? It could be trading $1000 an ounce in the future. Can Eugenia $2000 an ounce? How do you value that? We know that gold is scarce and we basically just believe that gold has value because gold has always had value. It is a non productive asset. Gold doesn't produce profits is abuse anything, whereas a farm or a rental property or a company that sells a product or service, it is producing something tangible and in his making profits from that production. This is why investing can be separated out so clearly from speculating when you are buying an asset like gold or cripple currency, or even is paying a high price for a high growth business at a speculation that is gambling , there's nothing you know, Eagle, about that there's nothing wrong with it except that you should know what it is that you're doing. What you're doing is risky, and you will probably lose money doing that, or as investing is something that is tangible, you've got some real value that you're getting. You know, if you know your real estate market in your local hometown and there's some sort of ah crash or the prices go way down and you know that property that you buy $100,000 is almost certainly gonna be worth a lot more than that in the future, then it's a good deal and it gets a real estate is even easier value because, you know, you could live inside of a house, and so it has very, very riel benefit. Everyone needs housing, including yourself, and so you can live in that house or you can rent that house out. So that's why real estate, such a popular investment. It's very tangible now. Stocks are no less tangible, especially if you know how to value them. And you don't over pay. You know, when you buy Disney or Coca Cola. Getting something very tangible is just The brand itself has this value of people's minds. Everybody knows it. It's been built up for 50 or 100 years or whatever is very tangible. So you want to think about those things when you think about a company, new companies tended riskier because we don't know, uh, what they're gonna do in the future. They have no track record, and that's why you know, investing it is fascinating, interesting, and it's very, very difficult. But learning the financial ratios, learning how to value the health of ah, of a company and then buying big dominant companies like some of the examples I've already given. It is a way to virtually guarantee that you're gonna be able to build wealth over time if you are patient, and that's really what it comes down to. So, um, an example here I mentioned here that are away. That means return on assets. It's not quite as useful as an r E. We are gonna learn about return on assets to see are we tells you how efficient companies use of total equity is that includes debt, are away doesn't show the return on the debt or other liabilities soaking it campaign a limited picture for investor. It tells you how much money you're making on your assets. It doesn't tell you if the company has debt or not. If the company had zero debt in the R. O. A would be exactly the same as our a week because all the equity of the company would be just the assets of that note. No debt in our way and our oh, it would be the same, and that would be useful. But almost zero companies have zero debt. I mean, debt is it is a useful thing to utilise its when business we call it leverage because it can kind of and inject the business with some life. And even if you don't need to take on debt, there's a lot of companies. Don't they still like uses, sometimes for different reasons like, for example, that interest rates a particularly low because the Fed lowered interest rates and the company has new new project that they're pursuing, they might say, Well, we can borrow money right now at very, very low interest rates and we can achieve this new project in a much, much shorter time frame than waiting for profits to come in and then allocations profits so might be worth it to pay a little bit of interest on some debt in order to achieve certain things. So debt in the business world can be very useful, so called leverage. But you know, that's what we also call debt and personal finance, good or bad, but typically considered that to be good if you're using it to buy real estate, mortgages, good debt or student loans are usually considered good. Of course, it's not always the case, but in general that's the case, and then your credit card debt is bad. It's high interest debt, especially if you use it to buy things you didn't really need. That's very, very bad. That, like that, is destroying its wealth, destroying. We don't want to borrow money and use credit cards. We can help it. But if you're a company, if you're a business and you're using debt intelligently like Elon Musk to grow, then it's not that. So. That's just something that I want, because I understand. But it's also a reason why the R E for most businesses is more useful than R. O. A return on assets, which it was just a little bit counterintuitive. Um, to the novice. Seems like return on assets would be more important than that. Debt would be bad. But I mean business. That's not necessarily the case. So it's interesting that just these ratios give you really good overall snapshot of a company's financial help. I mean, just knowing the price to earnings, the price of book and then the are we really tells you a lot. Now you know how expensive that businesses based on its profits, how expensive it is, based on how much how many assets it has, and then how well is using the profits and assets that it has. So those three things tell you a great deal, and they will automatically filter out the vast majority of companies that are weak and that don't have good earnings. Don't have ah, good are weak and that have are trading at a, say, a high price of book value or something. So you basically you screen out most businesses and then you narrow down Teoh a smaller number. Maybe you're looking at 20 or 30 companies. They have good stats. And then out of those companies, you a little more research to find out which ones are the best. Which one do you understand the best. And then you just make a few, um, investments in those smaller number of stocks And you are you now increase the probability exponentially that you're gonna get a good result of your investment. Next, we're gonna turn to the earnings growth ratio the so called a Peter Lynch ratio 6. Lesson 5 Price to Earnings Growth: So this ratio is favored by famed investor Peter Lynch because he said that it was his main single statistic that he would look at in the business. He wants to see that the company is growing. He wants to see that the price that you're paying in the stock market for that growth is not astronomical. And if you're buying company that has a sustainable PG of under one, and it means that you're paying a reasonable price for those earnings now, it's not as simple as that, because if it were, then everyone would just simply by companies with P G's lower than one. But Peter Lynch emphasize this more than something of the ratios, and he got very excellent results while he was managing money. So again, it tells us how fast the company's profits are growing relative to the price of its stock. If it's the PG is higher than two or three, it may be considered expensive, depending on the other factors. Always gonna look at the Ministry of the business problem margins, the debt levels and the company's future process. And this is why Warren Buffett he likes companies that are easy to value And so he likes companies that are really, really stable and aren't changing very much, Which is why he has stayed away from technology companies throughout his career. He's recently bought some Apple stock and some IBM stock and stuff like that. But he looks like Apple as a consumer products company, as much easier to value for the cells hardware as opposed to a tech company like Google. Maybe that is much more difficult to value because there's so many changes in technology. It's hard to gauge the future of Google's earnings, even though Google's earnings have also have been so far very, very stable and the growth has been very, very stable. Buffet wants to see a company where he can project out the next several years very easily. That's why he likes companies like Coca Cola, where they have very simple product mix, all much of beverages, and you can look at how many units were sold over the last decade or two, and then how they were doing over the last few years is very easy, the value that business and to tell whether or not you're paying too much for their earnings. Whereas Highgrove stock is much more difficult, so the PG ratio helps us with that. It helps us to measure the cost for the price of the company's growth. Basically, doesn't do us any good at the company's losing money. So it's a price to earnings growth. You have to have earnings in order for there to be a PG. So the P G's negative. That means that the company is probably growing. Its sales may be rapidly, but it's not turning a profit yet. And so it's fueling all of its growth. With, um, this stock has to be by selling stock to us. The investors is taking all that cash as investing it into building out systems and building out its marketing into producing whatever product or service it is that it sells. And it's just taking all that capital, probably borrowing money to using debt, debt and equity using a combination of everything to grow. And then the idea is that stock's going up because it sometime in the future of the continues to grow Indian market share, it's gonna become profitable. And if the company's big that the profits will be big. And that's what happened with Amazon Amazon is a unique company because for over 20 years it basically lost money consistently. But it was growing so rapidly that now it's becoming profitable and do Teoh its Amazon Web services of unit, which is all about selling cloud space, renting cloud space to other companies, mostly large corporations. That unit is highly probable is really high profit margins, is making the whole company profitable. So all of a sudden, Amazon is now both it rapidly growing company, despite its huge size in terms of sales. But now it's also very probable, or it's becoming very profitable and so that Amazon's a perfect example of this principle at work. So this is a important radio understand for companies that are growing rapidly, and the whole key to investing is to get you know as much or Maurin value as you are paying for. So it's just a really useful metric when you're trying to measure a growing company, tell whether or not you're getting a good deal. It's important to understand that companies sometimes traded discounts to their true value . When the economy is bad, people are pessimistic, and vice versus this ratio helps us to value companies in those types of scenarios as well . The PG might be under one because the economy is bad, but this particular individual company is thriving. Of course, there will always be a successful a group of companies in any bear market during any recession or even depression. Someone's making money. So why Jim Cramer, the famous TV personality who I think is ridiculous? I don't advise you to follow his advice because you just made the recommendations really nearly every single day on a TV show. I do like one thing that he says, which is that there's always a bull market somewhere and you just have to find it. And that's true. I mean, it's obvious that some companies are gonna make money in bear markets, and those usually think opportunities because they might be succeeding might be profitable . But their stock is depressed just because the whole entire market is the press. And that's when we need to find an opportunity for the enterprising investor. That's you. That's us. Eso understand this principle. You know that's what makes certain investors so wealthy. It's so great if they can find these mismatches between the market price and the true value of a business like Peter Lynch could do like Warren Buffett could do and many other famous investors. That's how you really make a lot of money in the stock market or in real estate, you know, our enemy and any type of investing. You trying to get mawr in value than you're paying for. I mean, that's the name of the game, but you gotta ignore a lot of noise and a lot of stuff in the media. Most of the time, people like Jim Cramer making all kinds of recommendations based on one little bit of views or whatever. And, um, you know, that's not what makes for good investing. You need to understand the fundamentals of a business and what makes that business great or not, and then make your own judgment calls to how much work. This is why you know it is complicated. And if you don't want to do this, a good idea is just to buy the whole entire market and get the average invest in the S and P 500 SPDR. That's the ticker symbol or the most popular low cost index fund that just give you a slice of the whole market. And just by that, whenever you have money and you basically guaranteed to get pretty good results and you'll sleep well at night, you want to stress out too much about your investments? Yes, they will go down. Sometimes is the market will go down. But as long as you're going toe, wait. You're not using money that you need to live, then you're your wealth is pretty much guaranteed. The hardest part is waiting through those bear markets. Which is why people like Warren Buffett and Charlie Munger, who are very proven and very conservative, they always people out of cash on hand, which does two things. It allows you to not be too worried because your portfolio's down because you know you have your money for living expenses. Um, you didn't have all of your wealth tied up in the market. So even if you're losing somewhere, it feels like you're losing some because stocks have gone down. You don't Your house is still your financial house is still in order. That's one thing it does, which is probably the best thing. The next thing is, if you're an enterprising person and you have a bunch of cash that you didn't invest in the market during, uh during market highs when things were going up. And then there's a crash. Well, now you're in a unique opportunity. Any situation where you have what we call dry powder, you have cash that could meet with work. And when most people don't. Because most people are over invested in bull markets when the prices are going up and you can buy stocks at a discount, which is what those guys always do. It's a very simple thing to say and to understand very, very difficult thing to do. Teoh, you know, hold that money and not investing in the markets going up because you feel like you're missing out a lot. Could have made a lot more about it, puts money in the market. But then when the market turns crashes and you also would have lost a lot more right, so the balance thing to do the rational thing to do is never be totally invested in a market and always have cash. But if the market is obviously in a bear market and it's obviously trashing and going below fair value like it did in 20,009 and you have a bunch of cash that you saved up. That would be a good time to put it to work. Now that does take courage, because due to the nature of human psychology, the way that we're wired, um, it's scary to put money into a declining asset. And it's very easy psychological to put money into an appreciating asset. But this very behavior is actually what leads to people getting bad investment results of oftentimes because they're buying high and selling low, which is the opposite of what we want to do if we're really good investor. And with that, we're gonna turn Teoh the price to the top line. The top line is, uh, sales or the revenue of company. All those have the same meaning. 7. Lesson 6 Price to Sales: so the price to sales ratio is one that is primarily used for high growth stocks because the price to earnings is not really that useful. If you're buying a stock primarily because it's growing its revenues very quickly again, I'll use Amazon as an example for the very first say, 10 to even 20 years almost now of Amazon's existence. Earnings were negligible or they were negative, actually, weren't even earning money. This is why this stock has confounded a lot of traditional investors because they weren't even earning money. But the stock, which is going through the roof because they were growing their revenue and taking market share at such a consistently rapid rate that it was inevitable they were going to be a giant company. And eventually, whenever they flip the switch of slowing down the reinvestment of all of their earnings, then all of a sudden there would be highly profitable. And now we're starting to see them become more more more profitable, mostly because of Amazon Web services, because that business where they sell cloud space is very high margin, and so all the sudden is making the company a lot more profitable. Basically, this would be a metric that would have been useful to look at Amazon in the 19 nineties and early two thousands when they're growing at a super rapid pace. But they were losing money. Attritional investor might look at that and go well. This company is losing money that press earnings multiple is negative. So obviously, this is a bad investment, right? And in historical terms, that would have been true because he's super high flying tech stocks. They are pretty unique when you look at the history of investing just because they are using new technologies and growing at such a rapid rate, and you don't know how long they're going to be able to grow with that rate. For most things, when you say like, Oh, this time is different as a really risky thing to say, That's why you get bubbles like the one we got in the in the 19 nineties that ended in 2000 a bubble bursting. But in the case of some of these these tech stocks in case of Amazon, you do have to look at valuations a little bit differently. We're seeing that now, as more and more companies trade at higher and higher valuations. As long as they're disrupting an industry and they're growing their sales consistently and it looks like they're gonna keep doing so for a long time, then you may be able to make a huge amount of money investing in these so called growth stocks. As long as they continue to grow, the stock will continue to go up. They are risky, however, because of that, growth at any point does slow down or stop when the stock is pretty much going to crash to . The whole thing is based on this idea that the growth will continue. That's why it's risky to invest in these stocks. But if you do so and you hit a time period where they're booming for an extended period of time, as we saw with Amazon, then that's how most people get really rich in the stock market. So again, that's what the price of sales is all about. We want to see how many times sales or in other, in other words, we call it the top line. Top line growth is sales or revenue. Bottom line growth is earnings or profit is a lot of different words. We use in business and investing. A lot of times they mean the same thing. So I just wanna make sure that we understand all of the lingo and everything like that. But so this veteran can be virtually useless and many companies, because they have a very low the price of sales like two or three, but not be probable, which can deceive investors. That's why I just explained that Amazon is useful. This lives mostly in evaluating rapidly growing companies, especially small companies, because small companies can grow rapidly for a really long time. Once you get big enough, you know there's not enough market share for you to continue to take. That's another amazing thing about Amazon is that since it's in so many different categories in different industries, is continuing to grow like 20% per year, even though it's worth close to, or it's actually passed a trillion dollars in total market cap valuation, and that's really amazing to think about. How can a company that big still grow at 20%? This is always the fear, with Apple apple also across the trillion dollar valuation, but it traded a much, much lower price to earnings and price to sales because there's only so many smartphones that people can buy or that they will upgrade, even though Apple has a lot of other products, like wearables, and it's shifting MAWR into services and things like that. It's primary product is the iPhone, and so it makes investors very wary, since the market is eventually going to be limited, saturated and has lots of competition. But with Amazon is different because they're in all these different categories. They've got Amazon Web services that are, as already mentioned, they've got a growing advertising business that's competing with Facebook and Google and others. That's also very probable. And then there, just in so many other categories, their core business of just online retail sales. It's still thriving, and there's disrupting everything. They're starting to disrupt health care. And so for a company like Amazon, even though they're now massive, they're continuing to grow at a rapid rate. Can that growth go on forever? Nobody knows. I mean, there gonna be competing and more and more spaces. It may not so far look the whole history of the company. They have never failed to maintain their growth, so you look at a price of sales of public Amazon. And you look at if it says like the price of sales is two or three times that may look, make the company look pretty cheap, actually, because they're growing at 20% per year. That means in five years, you know you will get that. That's those sales back and in five years, so but you multiply it times five, then it doesn't seem like a very expensive stock for really rapidly growing company. We'll get more into that, Um, here in a minute. Whole point is you want to use this metric mostly for high growth companies is not very useful for traditional basic retail company or manufacturing company company. You look at the price of sales, but the, you know sales are not growing, but the company is highly profitable. It's not going to really be very valuable information. For example, tobacco company that has really high profit margins, but it's not really growing at all. Separate you two price increases. It might be going like a few percentage points, you know, single digits every year. The price of sales doesn't really tell us anything useful. The company's not growing rapidly. It's not that kind of a company, so it really depends on what industry we're talking about here and what type of company we're talking about when we apply each of these ratios. It's just one of the reasons why the price to earnings still so popular because earnings or profits. And so even though profits can be looked at differently, whether the company is going slowly, not at all or rapidly, it does give you a sort of concrete bit of information about Okay, this company makes this much money right now, and we're paying this many times one year's profits for it, and that just gives you a really tangible thing to look at. Whereas the price of sales for a rapidly growing company is less tangible, E really gotta understand where that companies going understand the business model. So the point of kind of making here is that to be a really good investor, what a lot of people doing Warren Buffet talks about in annoying your circle of competence is they focus on maybe just one industry or maybe just one business model and getting to know that very, very well so they can value those businesses very accurately. And so for me personally, I like to buy service businesses. I don't have to have a lot of property, plant and equipment and tons of assets them to girls. So, for example, Google is a really simple company to understand. They make almost 90% of their money from advertising from their search results. We know they're the number one Internet browser and search engine in the world, by far dominant. They're gonna continue to be dominant and a very high profit margins. Because of that, they actually could be have could have even higher profit margins if they wanted Teoh. But we will also reinvest a lot of money into research and development in what they call their other bets. Now they have the driver, this car segment called Waymo and many other businesses that they're investing in for the long term. So I like that is, But any tech business, Facebook's another one. Um, so is, ah, Twitter. So is ah, Salesforce, which is like cloud services for businesses. All these software companies, most software companies or service businesses. They usually have really high margins because they don't have to have a lot of underlying assets property, plant and equipment. So they're Cape X that capital expenditures and liabilities are usually a lot lower. They usually don't have to be as leveraged. You know, Microsoft's another great example. People are going to be using Windows and Microsoft Office and Excel and word in all of those products for a very long time. They've got a huge advantage competitively with those products and since they licensed them or sell them outright a huge margins. Those, uh, businesses produced a lot of cash but doesn't have to always be service businesses, a priest, a lot of cash. I have used the tobacco company example, since people are addicted to cigarettes and they have very high profit margins are very, very cheap to produce. It's a very, very consistent business model where the companies producing a lot of catch. I like companies that produce a lot of cash. Sometimes the best stocks, though, aren't just companies that use a lot of cash because companies that use a lot of cash also very easy to value again picking us back to the P E ratio. But looking at the price of sales, you might look at a company like Amazon and many other fast growing companies that some of them even losing money like for a long time. Tesla's electric car manufacturers been losing money, but because of Elon Musk vision for the future and because it is very plausible sort of strategy of scaling up to mass production of cars that we're now seeing coming into fruition as the Model three is becoming one of the most rapidly adopted cars on the market in the United States. Now it's starting to show profits. And stock doesn't look as crazy Lee, overpriced as it used to. Basically, a stock is nothing more than the present value of all future cash flows. That's what a stock is on. This guy named John Bert Williams, who wrote a PhD thesis back in election twenties about this, basically defining what a stock really is measuring. It's measuring all future profits of a company than discounting them back to the president . Any of you can do that. Actually, you can say exactly how much a company's stock should be worth today. The problem, of course, is we can never know for sure how much the company is going to make in the future. This is Warren Buffett likes companies that are really predictable, so he can give a pretty accurate range of values for a business and say, Okay, I think that this company grows of 5% extension years. Here's how much profit is going to probably have, and I think I should value and you just kind of acted the president. OK, it's worth, you know, 10 million to $15 billion or whatever. Oh, but when I look at the stock price, the total market cap of the company is only seven billion. So it looks like that this company is undervalued by the markets. Intrinsic value. If my assumptions of the profits for the future are accurate, is much, much, much higher in the Stockyards. Give you credit for this is a great investment opportunity, and that's or something called The margin of safety comes in to play, which have already mentioned you're buying an asset far less it is actually worth. You have to know how to be the evaluations now, Everything I just said, confused you or soon really complicated. That's the reason why making this course on financial ratios because they just give you a quick snapshot of some of this information. You don't have to do super deep analysis to be able to ascertain whether or not a company is conservatively priced, conservatively financed and basically how risky it ISS. So this much it kind of shows the importance of looking at all the ratios and staff together to get a holistic picture of the business. If this mostly useful, as I've been saying for growth companies, it's more or less useful, depending on the company. But it just gives you another statistic toe look at you might be looking at a few other one's going home. This company's pretty good, and in the price of sales is also showing a reasonable valuation. It can just add more weight. Teoh the opinion that you are already forming about the value of a company. So obviously some rations give us more information than others. And I would say that this is why the P E ratio so popular, it tells us just in one stat very concretely how many times were paying for years earnings and the presses sales ratio is kind of so much the return on assets, which we're gonna look at later. So we've already covered the return on equity. How important that is as an efficiency rekia ratio was stable. Why don't we look at the return on assets? It seems like of the tournament assets to be even more important than the return on equity because the assets are things that we actually own, like cash or like property. But the opposite is actually true, because since we have leveraged ourselves by borrowing money, we want to see how efficiently we're using our assets and leverage together. That's the really important thing. If you borrow money and it's not leading to better results for the business actually bad. That means that you're not using those cap that capital effectively. But if you don't leverage your company at all, you have no debt. You can look at the return on assets that will give you, um, something useful to look at. Then you have to ask the question, Why are you not using some leverage to push your results over most businesses? Um, I don't want to say should use debt, But if interest rates are low and you have the opportunity to capture market share and you're not already like a really big established company. It's It's very reasonable to use some leverage and get better results for your shareholders . You just have to know how much leverage is too much. How much that is. Too much debt. Using death for business could be a very smart thing to do. It's totally different than using, you know, then consumer debt, like using credit cards for just everyday living expenses. I'm sure you guys have heard of, you know, the whole good debt versus bad debt arguments. Something is good mortgages, student loans you consider to be good, that some that is bad. Maybe that car loans definitely credit cards and things like that. So it all depends on how you look at this kind of stuff. Um, but again, I want to give you guys an example. Rapidly growing tech company with P prices Sales of 10 It may actually be okay, may seem really expensive. Oh, my gosh, this demonstrating at 10 times its sales. But its sales are growing a seven year, 80% per year, and it's a small company that's exploding into a new area, maybe a artificial intelligence or something like that. It may not be overpriced at all. In fact, that could still be under pressing the company. If that company is gonna basically quint double in size in, like two years, then prices sales of 10 may not be all that high. It also this you gotta look at this speed with which company is growing. This is why small cap stocks often I offered the greatest risk reward, or at least the greatest opportunity for huge gains. If you get in early on the business is what venture capitalists do. They sit there in Silicon Valley and look at all these entrepreneurs starting companies and try to get in very, very early, and so they can invest a relatively small amount of money and maybe hit a home run. So, you know, if your eventual capitals of a $1,000,000,000 and you only put 10 or $20 million into an early round of funding of the next Twitter or Facebook or whatever, you might turn that $10 million into 100 million or even a $1,000,000,000 because the company was so successful. So we look at these high prices sales figures what we want to see it rapid revenue growth mass was all about. And conversely, a company with the price of sales of less than one usually indicated a bargain because it means that the stock is trading at less than the value of just one year's worth of revenue or sales. So, you see, the price of sales is less than one. Either. That company is experiencing some really tough times and the market saying this cos like going out of business or there might be some good value their You know, everything in the stock market and business and investing in general. It's all about how much you're getting for your money. This is a very, uh misunderstood concept, and Warren Buffett, Charlie Munger are constantly trying to educate the public about that. You know, you could have the greatest company in the world trading at a price that is too high. Therefore, it's too risky because the company has to basically execute perfectly for you to make any money on. You can have a company. It's not actually doing that well, but because the markets so pessimistic on it is trading at a super bargain basement price, and you're getting a lot of value just because under priced it, just like when you think about he thing that you would buy an intangible product that you buy. But you know the price for eggs or milk or a T shirt. We know those prices could be to buy those items every day. If all of a sudden you see that the price for some of those things is way less than normal , you know that it's a bargain. I mean, unless it's like, you know, perishable food item that might have gone bad. But I mean, you know that if you buy a T shirt that's usually 15 or $20 is on sale for $3. You know you're getting a good deal. There's no way that you're over paying for that T shirt. You could buy 10 of those T shirts, and the same is buying one or two at full price. And so that's the way you need to look at investing as well. I mean, if you know, like yesterday, the price of the house was $200,000 for whatever reasons, real estate has gone into a recession, and all of a sudden, you know, for example, after 2000 and 89 house prices were cut in half. Basically, all of a sudden you could buy that $200,000 house $100,000. You know you're getting a good deal. It doesn't take a rocket science kind of scientists to do this stuff. You don't to be a genius. The hard part is the discipline and the patients of waiting for those conditions. It's very, very difficult to hold cash and wait and not do anything on. This is why Charlie Munger says the way to get rich is toe, have $10 million in the bank and wait for an opportunity. Now most of us don't have $10 million in the bank. That was pretty funny that he said that. But the point is, the way to succeed in investing is to have some money in the bank and wait for an opportunity. So you wanna wait for a situation where getting more value for your money, That's really all you're doing. That's all investing is, and these financial ratios give you a really quick glimpse. Is this a stock that is offering value or not? And what they mostly do is will screen out 90% of all stops and say, No, it's not a good deal, and then you can focus in on a few that are offering look, to be really good value. And then, um, you know, you wait for the the pitch is to go by as one, but it says right and investing. We don't swing at every pitch. That's why we have a big advantage. Baseball. You do get three strikes and you're out. But investment Hewlett pitch and go by one after another. You wait for a fat pitch, as he puts it, and then you swing it and you hit it out of the park. So investing the name of the game is his readiness and patients, and that's what makes it very difficult. And it's exactly the opposite of what we are trained to do by schools, by the pundits, by the news. You know, people like Jim Cramer out there making recommendations, believe Billy buy the stock, sell that stock by the stock. Still, let's talk every day, reading charts and doing stuff like that when in reality the exact opposite behavior is what makes you money over time, builds well over time, which is to be far less active, make far fewer investments, you know, far fewer swings of the bat, as brother puts it. But when you do swing, swing with conviction, knowing that the risk of losing money, eyes very low and the probability of building wealth overtime is very high, that's the name of the game. So just remember that and ignore everything else his That's probably enough on the price to sales and its usefulness ness. It's let's take a closer look at profit margins. 8. Lesson 7 Profit Margins: so hard to get you guys some examples about companies that tend to do really well because that really high profit margins and again tobacco companies are perfect example because it's cheap to make this stuff. People are addicted to it, and there's brand loyalty as well. I mean, if you smoke more boroughs, you're probably not going to switch to camels. And why would you switch? You been smoking the same thing, probably for a long time. There's no reason to switch brands, so you have brand loyalty. You have addiction addiction. You've got a huge profit margin. And this is one of the reasons why tobacco companies also tend to be very, very highly leveraged, their sales or super predictable, so they can use a lot more debt than a lot of other companies that don't know whether or not the sales are gonna continue to grow or decrease. And in the case of the baton companies, especially if they do have some weakness because you know fewer people are smoking, which is happening of course, every year fewer people smoke, which is obviously a good thing for society, everything like that. Tobacco companies instantly raise prices because the people that still do smoke are addicted, and they're gonna pay. You know, if you raise prices by 10% and you're a smoker, it's unlikely that you're going to smoke less because prices have gone up 10% on your packed cigarettes, right or 5% or whatever. So they can pretty much raise prices at will. And we see other companies that could do that as well. You don't have to be selling something super addictive to raise prices. Disney is constantly raising prices at all of his resorts. Some people say that the reason the price is too high, but if you're an investor when the company raises prices as long as they do it intelligently, usually ends up making the company more money. Like in disease case, for example, they constantly have to deal with overcrowding at their theme parks, and the theme parks are obviously super popular. And so when they raise prices that do thin up the crowds a little bit, which makes some people mad at prices out, a lot of middle class families you know they can't pay over $100 per person per day for a ticket. But if you raise prices by five or 10% and you thin out the crowds by a few percentage points. You end up making more money and having shorter wait times for the rides. And so it also kind of creates this idea of what economists call it Gethin good. Which is that to a degree, certain products or services. When you raise the prices, you actually increase the demand because you're increasing the perceived value. Prices of certain things go up, and it makes people want it. MAWR. So that's the case with luxury brands like Mercedes BMW, maybe Louis Vuitton and Gucci. Things like that as you raise the price. To a certain extent, it increases the perceived value by a certain segment of the market that are willing to pay mawr for the brand name and that that extra amount, they're willing to pay it just pure profit right doesn't cost the company any more money to produce that product or Teoh market it if they've got a getting good effect going on. So anyway, profit margins are something that's really, really important because even if a company is not growing or not growing, let's say faster than inflation, they basically raise prices in line with inflation, which averages around 2% per year over time. Again, I want to explain this idea that your company, a company, doesn't need to be growing profits and sales. It's highly profitable and has 30 40 or 50% profit margins, like tobacco companies or certain software companies. All of that cash can be used. It can be given back to shareholders and dividends and buybacks. Or it could be used to acquire other companies. And that's what tobacco companies doing now. Now that fewer and fewer people are smoking, they're taking the very, very high profits that they're still getting from the remaining smokers. And then they're reinvesting those in other businesses. So they're buying some alcohol companies like like Altria, which is a company that owns Marlboro. They also own a much of wine business. Is there also investing in the smokeless tobacco on the tape, uh, segments, and they're also looking to acquire legal marijuana companies. Now, I'm not recommending this as a good investment. I'm just explained to you this phenomena, uh, what you can do when you have high profit margins, even if you don't have growth. A lot of investors misunderstand the nature of stock, uh, market and of investing, thinking that, oh, things need to be constantly growing in order for investment to bear fruit. That's not the case at all. When you look at Berkshire Hathaway and their business model, Warren Buffett's business, I mean they invest in businesses that they want to be producing consistent profits. Some of those businesses will grow and produce more and more props over time, and others will basically just be producing cash very consistently. They take that cash and they use it to acquire other businesses. And they're so good at evaluating investments at allocating that capital elsewhere. Their whole business model is based on that, based on that skill to reinvest the capital. Now, as a person, as an individual, managing your personal finances for yourself, for your family, this is a skill that we don't learn in school but is one of the most important skills that we can have in life because we live in a free market capitalist society. I mean, most of the world now is a free market. I mean, depending on how regulated it is on how tax everything is. I mean, we live in a world of markets and we don't learn how to allocate capital in those markets, which to me, is just insane thing. I mean, we take in the U. S run from right. We have one e con class in high school which we may or may not pay much attention to you in who we learn a little bit about supply and demand in that class. If you join, um, you know, there's some marketing classes you can join one called deca, and things like that you can you conjoined some of these, um clubs and come to the class of most people don't. And even if you go to college and you get a business degree, you may still not learnt much about investing. You know, they teach the efficient market hypothesis and finance classes, which Warren Buffett and Charlie Munger have shown time and time again is very limited and in many cases actually wrong to use. They still teach it this very day they teach. The efficient market hypothesis is that markets are efficient price. Everything's priced into markets immediately, and if that were the case and no one would be able to beat the market right? You make no sense to do anything other than by market indexes and e T. F s. But the reason people that like Warren Buffett and many, many others get outperform the markets is because the efficient market hypothesis is, um is basically wrong in the short term, markets are pretty inefficient, actually, in the long term, that quite efficient. That's why he says the market in the short term is a voting machine. You know, it swings around based on news and other information coming in and then in the long run, its away machine. It is a pretty good job of valuing the company, which is why when you hold a really good investment for a long time, you're gonna get these long compound and returns that make you wealthy. But if you move around constantly trying to guess which stocks go up and down, it's telling throwing dartboard, uh, throwing darts at a dartboard and is hoping that you're gonna you're gonna hit a winner. It's just basically like gambling behaviour, and very few people understand the nature of markets that I just explained, and even fewer follow it because of behavioral finance. I've got some courses on that because of the nature of humans and the way that we're wired of it, Of course, on the psychology of investing explains this when I could get into it too much in this course, I want to stay focused on these ratios. But the point here is that profit margins are really important for most businesses, and it makes it easy to value a company. We can look at how much they make in profits. It's easier to value a tobacco company than it is to value Amazon. Let's put it that way. We're looking at a super fast growing company. You gotta guess how long is gonna grow for when you're looking at a company that's not really growing anymore but has really high margins. You can just take a price to earnings multiple, and then you just got to say, Okay, how long are these margins and how long is this profitability likely to go on for now, for tobacco companies used to be really easy to see that looked like it was gonna go on forever, so they were, like, really, really safe invest. And if they hide evidence to Booth a 45% didn't. So they're really, really good investments. Now. Things are starting to change as fewer and fewer people smoke and they reinvested profits into new segments like marijuana and wind. Other. You know, sin stocks in companies s so called, um, it's less clear how long these high margins will last four. But these these managers of these companies are very intelligent, and they they're making some pretty good moves. It looks like they're gonna be fine. I don't personally invest in those businesses. Um, but they're a good example of a high profit margin business for us to to look at. So the point is, you're growth isn't always good. It's not always we want in a business something. Companies go fast but burn through all their cash and they have low margins. And the interview Bad investment. Hi. Cash producing businesses are usually the best kind of investments. I mean, there are exceptions like Amazon and others that I've cited. But if you wanna aminvest with a high probability of getting a return on your on your capital, that a good idea is to find companies have high profit margins that are very stable that paid dividends. And then, you know you're gonna get some some cash in the form of dividends. You're gonna get some reliability and stability. There's gonna be a lower volatility. And so, second, logically, this is easier for most people to hold stocks and not fret. Holding stocks is a lot different. Holding something that real estate is just feels differently because you get price quotes every single day. The stock market is a price. Quoting machines tell you telling you that Oh, this is how about your assets worth today? This is how much your assets worked at it. And every day goes up and down some of the swings by multiple percentage points, right and single day. Whereas when you hold real estate, the value of your assets also does swing up and down. But you just don't see price quotes for it. You're not seeing that. Oh, some was often to buy your house at 5% lower than yesterday. Sums often to buy your house at 10% When? Yesterday. So stocks are very psychologically difficult to hold compared Teoh something like real estate, which is another reason why stock good profit margins and stability can be better investments than high growth companies. Just because of the nature of the company itself. The investment underlying investment and not having a swing so much in price just help you feel good and sleep at night. So the company has flat sales but very stable in high profit margins. It's good you can you again to repeat myself here. Just do you guys really understand this? You can reinvest the profits into the business for growth. You know you can go through investing through increasing sales and marketing. Um, I already explained the Berkshire Hathaway model, or you can use it to buy entire companies through acquisitions and so you can grow by buying more and more companies. And then the more companies you buy with your cash, the more cash those companies produce as long as you made smart investments in those businesses. And then the more and more cash you have to return to shareholders dividends and to buy more companies so you don't need to have a growing company to take province and reinvest them. It's just like if you save, you know, one of $2000 a month from your paycheck. You know you may not have a growing salary that's growing up five or 10% per year. You might get the same pay check for 20 years. But if you take $2000 a month every month and buy stocks well, those your portfolio is gonna grow to become very large, eventually assigned to get decent returns. Even though you're not getting an increase in salary, you're saving money that money's going. What's the same principle when you buy these types of companies so again they could pay dividends. It can buy back stock and buybacks of controversial because a lot of companies do it when the stock price is really high and that destroys value. That shouldn't do it, but it continues to pump the stock up and investors like that. But in the short term, it's good. In the long term, it could be really bad. So you should only buy back stock when it's trading at a reasonable level. Like Apple's been buying back billions and billions and billions of dollars worth of their stock over the last meet several years 5 10 years because has been trading at pretty low valuations between 10 and 20 times earnings for a company that soup profitable and continues to see consistent growth and everything you taking all the cash that it produces and buying back stock seems like a really smart thing to do. It's a value added activity, whereas you know of Amazon was constantly buying back its stock. That would be a really stupid thing to do, because Amazon's whole business model is to grow and to take market share and getting all these different pies and all these different industries. So taken the cash we have on buying stock and also the stock of Amazon trades at a much, much higher valuation. So buybacks for Amazon make absolutely no sense at all. And, of course, management doesn't use their earnings for buybacks. They use their earnings from growth. That's what they created Amazon Web services and knew the advertising business I talked about. They bought Whole Foods not that long ago, and they're acquiring MAWR businesses. They're growing, so buybacks makes sense in some situations and not in others. The same thing is true for dividends as well. Course so another factor to consider when evaluating investment is to look at how you know what is causing what is causing the currently high profit margins and think about how long they can continue for. So this is the example. I already talked about tobacco for a long time. It looked like it was gonna continue basically forever. So tobacco companies were really, really good investments and other reasons. Backed companies used to be good investments because the valuations are always lower than they should. Because a lot of people look at tobacco companies is being, you know, immoral. You know, the products kill people, and so that means that comes a lot of investors out of them, which kept the price of those stocks artificially low. You normally a company that is that probable would have a lot more interest in the stock and a stock in trade in a much higher p e. So tobacco companies, or, like, almost always really, really good investment. But now the smoking rates in Western countries are finally starting to get low enough that it looks like they're getting more and more risky. Um, but that isn't the saying that they're bad investments. And they said those managers air reallocating capital to acquire other businesses with all the cash, and they still they still may thrive. But it's less clear. You can't see how long on the results are going to last four. And so it adds some risk to it. A super stable business with good profit margins that isn't growing. It could end up being an outstanding investment if those results don't change for decades. Like Warren Buffett's investments in See's Candy, Coca Cola and Gillette are really good examples. So see's candy was investment in human Charlie Munger made in the early seventies. They paid $25 million something for this business, and it's a regional business. It's a sort of, ah, gourmet chocolate. Um, business that is based in California has really high profit margins, and there's basically nothing that they change about the packaging or the way the stores look or or anything. All they do is just, you know, every year they raise prices a little bit and people pay more. You know they do big business during the holidays, and the rest of the year they don't make much money, but they have such high margins, and they make so much money during the holidays. That's a really, really good business, and they basically they're kind of like a tobacco company. I mean, they sell a sugary I wouldn't say addictive product, but something that, you know people are gonna buy in large volumes every Christmas. And since sees has a really good brand, people are willing to pay pretty much whatever for a box of chocolates from sees. I mean, if you raise the price 50 cents on a box of chocolates, people aren't even probably gonna notice or care, because it's something that they buy it during the holidays. They're gonna pay whatever it is you have to pay him within a reason. And so that's the type of business where they know they're gonna get really consistent results. They haven't even changed like the manufacturing equipment that they use 30 or 40 years ago , according to a Warren Buffett. When you hear them, until they used the exact same like that's to mix the chocolate in the same machinery. So that means that the reinvestment of cash and the businesses like zero, and they have a very small staff, but they can produce huge amounts of chocolate, but they sell very, very high profit margins. And so it was a great business and all the cash from that business, even though for picture at the right now it's a teeny, tiny slice of their overall business because it's a huge conglomerate. They just take the, you know, the tens of millions of dollars that this company produces every year, and they just re invested elsewhere. So it's been like amazing business for them, even though they paid what they thought at the time was a pretty fancy price for the original businesses was like a turning point in their careers, and they started to realize the power of paying a little bit more for, like, really good businesses that are gonna be strong for a long time. It's all the same thing in Coca Cola. They paid, like, 15 times earnings for Coca Cola or something like that. Um, in the eighties, which for Warren Buffet, it was considered to be kind of a lot. He was always looking for bargains early in his career, but actually saw how good of the results were for seized. They thought that Coca Cola was a good investment and it was undervalued at the time, and it turned like a $1 billion investment until, like what's now worth, like $20 billion or something on bits has been a huge, huge winner for them because the products so simple understand? You know, people are gonna drink Coca Cola products no matter what. Now people are becoming similar to the back of companies along, more conscious about their health and drinking sugary beverages. But Coca Cola's takes all the profits that they make from their original product, and they reinvest them into healthier drinks and other sideline businesses. They're firing like coffee companies, tea companies, things that are still related, toe beverages into something that arm. And they're also looking at buying food companies whatever. But they can take the capital from their high profit margins and reinvest them into other businesses. And so poke holds a very, very stable business. Appears that three plus percent dividend, and you can pretty much guarantee that if you invest and don't over pay for that business is gonna give you good returns over a long period of time. And it's just simple, right? Gillette's another good example. Gillette's a little bit different because Warren Buffett but Gillette, his calculus was open, so people need to shave. They have to buy razors, right? It's like when you buy on HP printer, you have to buy HP printer cartridges and the printer cartridges themselves for like almost is expensive in many cases of laser printers. As the printer, you pay $200 for a printer, but the cartridge costs 100 $50. You buy two cartridges, and you've already pay for the whole printer again. And so they make money with reselling of something to you over and over and over again. And so that's a very, very easy business to predict the sales Now, there could be some disruption, as there has been, uh, in the last few years in the razor blade market, there was a Dollar Shave club company that came, and you know they had, like, a subscription model where you pay a certain up month and you and you get your razors or whatever. And it seemed to be undercutting Gillette somewhat. It seemed to be something that people like, but it ended up kind of being a trendy thing. That was a fad. When you have a brand like Gillette that's been built over, like, 100 years. You're not gonna be able to come along and easily just knock that off even if a lot of people do find out about a competitive like Dollar Shave club for some of these upstarts and they like them a t end of the day. The market position of some of these powerful brands like Gillette. It's just not gonna, you know, be taken down. One example, Warren Buffett said. It said if you gave me $100 billion I would not be able to take market leadership. Coca Cola on the Coca Cola brand has been being instilled in the hearts and minds of, uh, consumers for like, 100 like, 50 years. And everyone knows Coca Cola. I mean, certain brands are so strong that they're just gonna exist, like pretty much forever. And Coca Cola seems to be one of those brands. Maybe you could say things. Brands like Nike and Adidas. Those brands are so powerful that even if those companies are not growing sales and profits by 20% per year, like maybe Amazon, Google or some of the tech companies are, it doesn't mean that investment in one of them is is any less affecting investment in those kind of types of companies might be much better if you're paying a lower price, right? You pay fancy prices for these tech stocks, and often times you pay much lower prices. For some of these so called your old economy stocks, you might be getting much better value. So we when you look at profit margins, the point I want you guys to remember is they show you something tangible, and it makes it easier to value a business that has high profit margins. You're getting money, you're busy paying for cash and you buy Amazon and you're paying a really high price. That stock. You know, people may say that's a really good investment, and I actually do own a few Amazon shares because the business is just to such a strong business. You're paying a high price for it, so it is a bit risky. You just hope that the company continues to grow. But when you, by Coca Cola or Gillette coursing, Gillette's wholly owned by Berkshire Hathaway now is he can't buy stock directly in Gillette. But when you buy these types of businesses on and you get a good price for him. You know that you're not going to get 2030% returns on your money. But you also know that you're almost certain to get an adequate return and safety of principal, which is our definition of I'm intelligent investing. So you know, the choice is up to you, but understanding the profit margin understandings, financial ratios will give you the information that you need to make these kinds of decisions. Next, we're gonna look at earnings growth rate. 9. Lesson 8 Earnings Growth Rate: we talked about how fast the prices took a how high the price of sales could be the presto armies could be, I would say, depends on the earnings growth weight. But how fast our profits growing and what does it mean? You know, a company with rapid earnings growth will naturally trade at a much higher P E and slow growth companies, as I've been explaining throughout the course. This is difficult to evaluate, though, because your investment decision we based on future sales, how long will this broke continue? It's really hard to know. So why so called value investors like Warren Buffett? They focused less on growth and mawr on price because getting tangible value based on today's tangible realities related to the stock price. This gives you an idea of value. For example, if you buy a certain brand of car like a Honda on, that is well known, Teoh be very reliable. For a long time, you might have a really good idea about the value of that car, and you can kind of gauge Okay, well, I drive this car for 10 years, and I'd be $10,000 for it. That's a good value, whereas if you buy a car that's less reliable, it's harder to gauge value. If you pay $10,000 for this other car, you don't know as much about it might be riskier. Well, you can look at stocks in the same way. So how fast profits are growing is a little bit tricky. You can look at the stock. It's growing profits by 20% annually. But you have to know, Are those results gonna continue? And also at what price to earnings multiple. Is that going to be fair? So this goes back to what I was saying in the last lesson. We look a profit margins, the more tangible the information is, and the more actually you engage what a company is worth. And then look at the stock price of its trading conservatively, then it's easier to buy those stocks and have a margin of safety. That's why Warren Buffett likes it was kind of stocks. That's why they recently bought a huge position in Apple because it trades at a much, much lower valuation than Google or Facebook or, you know, Amazon, the other so called fang stocks, whereas a lot of messes are wary of Apple because of the reliance on the iPhone and his lack of diversification in the product lines. Warren Buffet looks at it as a consumer product company rather than a tech company and how sticky the product is. People are gonna continue to upgrade their iPhones no matter what. Now will they continue to grow their sales and profits forever? Maybe not. But it's also almost a certainty that that company is going to be highly probable for a very long time, and they can reinvest those profits and dividends and buybacks and new product lines. But the point is that Apple's trading at a much lower valuation. At the time that Berkshire Hathaway open their position in the apple, he was treating it like only 11 or 12 times earnings, which is almost unbelievable if you think about how good of a business it is, and that just shows you the nature of markets and investors and how they're always trying to look to the future and when the future is a little bit uncertain, that might discount a stock. And in this case, the price you pay for a stock like Apple weren't but the office. He saw it as being very attractive. Future was more uncertain in a way, but if the price is low enough, it's worth it. You have a margin of safety, whereas these growth stocks, it looks like they're gonna go forever into the future. But that's also one certain, and you're paying a high price for that certainty, so I hope that makes sense. So on the one hand, the greatest returns usually come from investment in rapidly growing businesses like Amazon . As long as the business grows, earnings for an extended period of time is not unreasonable to pay 20 or 30 or even 50 times earned for that stock. Usually the price to earnings around 15 is about average, depending on interest rates and current economic conditions that right now the price earnings of the S and P 500 companies is around 22. It's it's higher than average. People say that stock market is overpriced, but that's because interest rates are low. So when interest rates are low, it makes assets like real estate and stocks attractive, and so they get inflated When interest rates are high. It makes the attractiveness of stocks and real estate go down the demand for those assets down, so the price is also go down. People can put their money into interest bearing products like CVS and maybe get you know, let's say you get five or 6% interest on just putting your money into a bank. But why would you risk your money in the stock market to maybe only get a couple percentage points more a year, but also maybe to lose your money? Whereas if you could just put it into a banking, get a 5% guarantee return? That's pretty attractive to a lot of people. So that lowers the demand for stocks and real estate. So long as real estate or excuse me. As long as interest rates are low, stocks and real estate prices will be high and vice versa. Now, we don't know how long real interest rates will stay low for, and that's the question. That's why you know, no one has a crystal ball, so what you want to dio is fine value for your money. Whenever this stuff starts getting confusing, just think value for money. Am I getting more value that I'm paying for and you can't answer that question that don't make an investment. It's that simple again. You can see it with a T shirt with the car. With purchases of food, you need to learn how to look at investments and see the same thing. Am I getting good value for my money on this investment or not? When you look at Apple and how profitable it is, look at his profit margins. You look at this price to earnings ratio. Look at the dividend you look at. The iPhone will probably look at the power of the brand if that companies training it only 10 times earnings. You know you're getting good value. I mean, can't be otherwise. But if it's training at 20 times earnings 25 times earnings now it's questionable that I want to pay that much for the earnings. If you know it's gonna have problems in the future, the stock price might go down. Um, so that's the judgment that we make as investors and these statistics and these ratios give us a whole lot of information and just diffuse small little numbers. And that's what this course is all about. Even though I'm going off on these tangents and explaining kind of a lot more than just with these ratios mean hopefully teaching us a lot about business and investing in general , the whole idea is to boil this complicated subject down into a few, um, sort of, uh, how I want to put this. I want to say quotations, but a few fundamentals that we can just no rules of thumb that we can use when we are making these decisions. So a company that is growing earnings at 20% per year consistently may trade at a PD of 30 and be a bargain. You know, if that growth rate is sustainable, paying 30 times earnings is totally reasonable. Okay, um because you can just look at that and say, Well, if they grow 20% per year, you know that business is going to double in value, like every three or four years. So that means you're gonna be getting your money back every three or four years, and that growth rate continues. The PG could maybe even go up higher stock will just keep going up and keep going up. Keep going up. So that's what it's all about. A company going her is that only 5%. It may also be a bargain if the P is, say, less than 10 but expensive if it's over 20 not just give you an example of this with Apple , so same thing applies there. These are all the things that investor must consider when they're evaluating stock. The ratios are a shortcut to help make such evaluations. And when taken together, they give us a holistic picture of the health of the business, along with the other qualitative factors. Right? The quality. In fact, if you want to look at the value of a brand, gonna look at things like goodwill in the past. Record of the company. You look at the industry and nature of the competition. So already made the case for for these ideas, when I talked about how it would be almost impossible to not Coca Cola off its perch as being sort of the King of beverages, same thing might be true for Nike. Same thing might be true for Google. I mean, what company's gonna come along and become a better search engine and Google? I mean, it's basically impossible. I mean, they were the first search engine to use sophisticated algorithms, and now they've been building on that for whatever 2025 years there. No one's gonna come along with better artificial intelligence products in Google and then be able to market them and then everyone that all of a sudden, like stop using Google and trust some new search engine. All the websites in the world are indexed into Google, so it has a competitive advantage that is just astronomical, right? It's the value of its brand is goodwill, its past record. All this investments that has made those things have value. It don't show up in the parents ratios. So Google has actually been trading kind of flat for the last couple of years. And so I think, personally that Google right now is a really, really, really strong good investment. It hasn't gone up as much as you're the thing stocks, Amazon, apple, etcetera, etcetera. And part of it is because people worried about antitrust things and regulation coming. Um, that's a whole nother topic. Oftentimes, regulation actually ends up helping a, um, a monopoly or conglomerate that we saw this in the tobacco industry because when they outlawed marketing, for example, saying that you can't market tobacco product. That helped the incumbent companies because it basically blocked competition from a startup Tobacco companies and they can if they can't market, do the public, how are they gonna grow? So even though it seemed like it was going to hurt, you think companies actually just help them because it just blocked out all competition? And so a lot of times, regulation has unintended consequences. And so, like, for example, of Google get broken up because regulators say its monopoly, it will most likely unlock value in the stock and then invested that owns Google stock all of a sudden. Now, if they broke up the company into 10 companies all of a sudden, now they'll have stock in 10 different companies. And usually when you do that, it unlocks value that some of the parts all of a sudden breaks open and stock was up. This is what happened when standard oil got broken up in the early 20th century, Rockefeller, the founder, he said. When you when you found out the decision that was going to be broken up, he advised, investors said, Don't sell the stock because he has a deep understanding of business. And indeed he was right after they broke it up on the stock. Of all the companies went up because it was still super valuable. They just were no longer one company operating as a monopoly they were. Now it is the whole bunch of really strong businesses operating separately all across the country. So anyway, that's just a little a little bit of insight into some of the intangible, qualitative factors of a business that also go into the evaluation consideration. 10. Lesson 9 Revenue Growth Rate: so revenue growth rate is really similar to the earnings growth rate you're looking at. How fast is growing? How fast is the company going with earnings growth? We're looking at profits with revenue growth risk looking at sales. So I kind of already gone over this, But I just want to kind of go over it a little bit more specifically in this lesson, I've given Amazon and example a lot of these big tech companies. In the example. It's very similar to the earnings rule previously discussed. Earnings are generally more important than revenues because you can have revenues with no profit. So most of the time, the vast majority of the time you want to look at earnings growth, profit margins and be focused more on the P and on profits. But if you're the type of investor who likes risk, who likes growth, he wants to invest in something that might be able to grow for a long, long time. And you were going to take that risk than the revenue growth rate. It becomes much more important because rapidly growing sales show business is getting market share. You know, maybe putting yourself into a dominant position in the future. So Amazon, Netflix Shopify Trade desk Salesforce All these tech companies here have really rapid revenue growth rates between 20% and 100%. And so they trade at really high valuations. You might look at their P E and P price to earnings. Might be, you know, 50 or 80 or 90 if you look at just that, you Wow, this is a way overpriced stock. But then you look at the revenue growth and the revenue growth was 50% 60% or 90% always. And now it's like, Wow, this company is going to double in size, basically one year, 1.5 years. Um, this is not too fancy of a price because it keeps doubling in size for 10 years or 20 years . You're gonna eventually have a giant company that's gonna be dominating its marketplace. And so I think, for example, right now it's Shopify trades it like actually, Shopify loses money. Netflix is not profitable, but trades like a p e of, like, 200 or 300 or something. And so about a lot of investors look at that and go, Whoa, that is ridiculous. that's a bubble. There's no way I'm paying that much for it. But if it's growing revenues of 6% at some point, once the profit margins rise in a necklace case, it's still very inexpensive. It's like $10 per account or whatever, and making has raised prices. So is Netflix it to use to grow by now, they're spending more and more money on content as they acquire movies and make their own content as well. Every year it seems, or two, they're raising prices by 10 or 20% and Netflix is probably still underpriced. I mean, eventually, you might be paying twice as much for your Netflix a subscription, but the content they have on there might be overwhelming compared to competitors. And once the company you know has a market cap of like, let's say, 500 billion or $600 billion it become probable all of a sudden now, um, it might not look like it's so expensive at all. So the revenue growth, it's really important for these type of businesses a company growing revenue of 50% but losing money like Spotify, it could still be a good investment as long as small as a long growth runway. So if you look at a company's losing money but growing fast, he's gotta be sure that has a long growth runway that's like the whole point. So it's usually a really, really small is just starting up. Spotify basically competes or since Spotify Snow SUV last last one second with Shopify, Spotify is a music subscription service kind of apple music and growing really, really fast. But it loses money. Shopify was the example from the Last The last one, which is a storefront for selling products online, and they both have some of it. Similar characteristics are both growing super super fast and are losing are losing money. These investments can be difficult to evaluate, as I've already mentioned, but they can also get some of the greatest returns. Service businesses tend to be less risky as they have lower capital needs and there's cash machines. That's what I like to invest mostly in service businesses, software companies, they just produced high margins and growth. As long as they have a good position in the market, you're probably gonna do well on those investments provided that you don't pay too much a company growing rapidly but losing money like a state Tesla, which is capital intensive. You're gonna need to manufacture automobiles. That's really expensive. That type of investment is there's a lot of risk here. People believe in evil, and must they believe in electric cars? They believe that's the future, and so they're willing to make a new investment in that business, and that investment may turn out well for them. But it's very, very risky because so much cash is needed. Test is constantly borrowing money, leveraging themselves. They're issuing bonds and notes, and they just need caps and cash to scale up. And if all goes according to plan, they may make investors very, very wealthy. But everything must go according to plan. In order for that to be the case of the risk reward, there is a bit iffy. I mean, if you're you know, if you're off in a little bit by your evaluation, and Tesla doesn't actually, um, execute the way that everyone expects or hopes, then you're gonna lose. Maybe a lot of money on that investment. You gotta remember to. Competition doesn't sit on its laurels. While Tesla's may have been the first mover in mass producing electric vehicles. All the other car companies are now trying to get in our game. And so it's not gonna be so easy for them. They have this model three that looks like it's being very successful, but they also have a lot of controversy in the founder Yuan must and his leadership. And it's not that hard to see other companies like GM and Ford and Nissan and Toyota and others you know, catching up with them in the electric vehicle space, or at least pressuring them by having so many competitors. So that's the kind of company that I would stay away from personally, whether or not you believe in the mission and you believe in the leader as an investment, it's risky. And even though it's it's growing, its revenue, uh, quite rapidly. It's also uneven. It's hard to say how many cars they're going to sell, but it's pretty easy to see how much revenue you know Google or Amazon are probably going to make next year. You might be off by a few percentage points with those companies, but your valuation will be in the ballpark with Tesla's You just don't know it could be up or down, but 30 or 60%. And I mean, that's not have investment that I want Teoh be investing in Okay, so it's not as useful in general, has a P e ratio or earnings growth rates the revenue growth rate. It can be the key indicator if your goal is to invest in small wrap the growing tech companies with a chance of a huge pay up down the road. So it's a high risk, high reward kind of statistic and really just comes down to your personality and what type of risk profile you have, what type of investing you like to do and almost need to learn that about ourselves. If we're gonna be managing our own portfolios and this is what the psychology of investing is all about, that's what they call in finance now. Behavioral finance. We're learning how important psychology is investing, and depending on your personality, they're gonna want to choose a style that suits you. Um, so it's an important thing to think about 11. Lesson 10 The Current Ratio: so the current ratio is pretty useful because it tells us how much cash the company has on hand relative to its liabilities. How much money that has spoken for that has earmarked. That has to pay out. So usually that means how much interest that have to pay on deaths. It might be how much ASTA painters of accounts payable to vendors and things like that. So a current ratio that's less than two is kind of on the risky side. You know, it's not that big of a deal that's less than one. That it means that the company may be having cash flow problems right if the if the current ratio was like four or five. That means they have, like, a fortress like balance sheet, and maybe even they have too much cash. Like companies like Google and Facebook, they have basically no dead at all, and they have a current ratio of like four or five way more caps than they need. Usually that cash is being reinvested into research and development, or maybe share buybacks or things like that. But sometimes a company can actually have too much cash, and that's when the activist investors will come along and say, Hey, you're not using your cash very well. You need to be putting that stuff. The work. You know, you have no debt, You're not leverage. You have all this cash. You should be returning it to shareholders and pay a dividend or a buyback or do something with it. So that's just kind of an interesting side note. But the main thing is me. Look at this current ratio, usually want to see it. If it's efficient, it should be around two because it's around two. That means the company is, is being relatively aggressive and putting its cash to work and using its cash kind of like an efficiency ratio, like the return on equity that tells us like how well, choosing its capital, this is kind of the same thing, But this is a little bit more about cash flow. How much cash is on hand? Does the company have enough cash for its operations? Too much cash and maybe a little bit inefficient, too little cash? And it may be at risk of not being able to meet its obligations. You don't want companies that too much debt be paying too much and interest when that money could be used for growth. Another hand. If the debt was initially taken on to get market share or to gain growth, then it may be okay, so it just depends on the company. So the rules of is a normal current ratio is around to, so companies with high profit margins tend not to need such high current ratio. So again, look a tobacco companies. There's a good example for various reasons for some of these things. Um, companies that have, like high capital expenditures like auto manufacturers, should have mawr cash on hand because they don't usually indication of a high risk investment, especially that they're highly leverage, Like Tesla's but tobacco company, they have very low capital expenditures because producing tobacco and super mass quantities is very, very inexpensive. I mean to produce, You know, one cigarette. If you think about Pakistan has 20 cigarettes and it sells for in the U. S. Like around $5 or whatever you know, the cost of that one cigarette is only is pennies. It costs pennies from the make. But if they're selling their selling a pack of $25 they're making you know more than a dollar, $2 cigarette or whatever, Whatever the cost is or not, Guess not a dollar, but you know, maybe 50 cents or whatever. And it only cost a few pennies to preset cigarettes by a huge margin on that. So because there's so much cash coming into the business, they can have a much higher leverage and much, uh, lower current ratio. So but tobacco companies a ratio of one or even under one. It's not really a concern, and this means that the cash, the cash being spent, But it's also, you know, it's gonna be coming in. Whereas some of the other companies, like a manufacturer, they need to have cash on hand because and the capital Spanish, your levels are so high that you can't run out of money. I mean, they can if they run out of money than manufacturing stops, and that would be like, you know, a death sentence for that company. But for a tobacco company is just not gonna happen. People gonna keep smoking, and if they needed to, they could raise prices. Or they could just leverage themselves up a little bit more que the production going because the production cost is so low relative to the margins. So that makes sense. In general, the German ratios gives us That's a quick snapshot as to the health of the company's cash full. In the short term, a company has to have cash flowing through the business, whether it's in the form of of debt, whether it's in the form from sales from profits, you need cash to operate right. That's why the three main financial statements of businesses are the statement of cash flows, the balance sheet and the incomes. David Incomes David shows US profits. That balance sheet shows US assets, and the casual statement shows US cash phone of that cash flow again doesn't have to be from profits cash and come into the business from debt or from investments from stock from from any, any different way that cash. With the new of business, whether it's debt or whether it's profits, it's still cash into the business, and the current ratio tells us how much cash the company has. So it's important to take each ratio any consideration, like together along of all the others, you know, to get a holistic overall picture of the fans healthy company. And the more you learn about all these ratios, and the more you learn about accounting more quickly and accurately, you'll be able to look at like, say, these 10 ratios and say who this companies that really strong financial position? And oh, I know this brand. Oh, I know this industry. This might be a really good investment. Here is P E. On and vice versa. You might. You might look at just a few of these and go Well, not for me. This is not a good investment. You just scream it out. So it takes a lot of the confusion out of the process, and it saves you a lot of time. And, you know, just like we want to use our capital efficiently when we're, uh, evaluating investments. We want to use our time efficiently, right? We only have so much time of the day, and when we're managing our hard earned money that we saved through the sweat of our brow, we want to be able to put it into an investment, or we can see well at night knowing that is compounding, and we don't want to spend 10 hours a day doing it, right, so that if nothing else, you know these ratios save us time on with the current ratio. Basically, anything under one can be a major warning sign that the company is experiencing a cash flow problem as you want to stay away from those companies. All right, in the final lesson here was going to summarise the main points of gone over the course. 12. Lesson 11 Summary: So, as I've been saying, maybe even like a broken record, hopefully, because repetition is good for memory ratios are a quick way to size up a company's financial position as well as its sales growth is profit growth. It's sustainable or lack of sustainable levels of debt on the balance sheet strength, profit margins and just the overall help of the business. A seasoned investor can look at these ratios and immediately screen out 90% of companies and focus on just a few good prospects. Understanding just a handful of financial ratios. Consent you countless hours but not having to read each company's financial statements. Not having you know, not only the most current year, but previous years as well. I mean, if you think about reading just just the financial statements of one year, one company, that's a very, very time consuming endeavor. Now Warren Buffett spends 80% of his time reading. He really, really enjoys this, and he has all of his time to do it, and he's also like the best of the best at it. So, you know, 99.9% of the investing public is not Warren Buffett. They don't want to sit there all day long. Reading financial statements and annual reports is too time consuming. It's too confusing, is too much data. It's too much information, and most of us don't understand it well enough anyway. But if you just look at all these financial ratios is a huge short. But I mean, it seems you an extraordinary amount of time, and it gives you a lot of information and a small amount of data, so it's just super efficient. It's one way to think about it. And so understanding financial rations will make you a better business person. And an economist will also helping you with your personal finances. Not just about the best time. This helps you understand business better. If you are entrepreneur and you run your own business, you should be thinking about these ratios and how they would apply to your small business. Even if you have just a little coffee stand and you only make $20,000 a year, whatever, you can make it more efficient. Maybe you can find ways to grow sales. Maybe you can look at your cash flow, you know, just looking at it under this lens, of efficiency and these different ways that big companies measure things. Maybe you can apply that to not only your business but your personal finances. I know that when I manage my personal finances, I'm thinking about these things all the time, and I kind of run my family's personal finances as if we are a business. And I'm a chief capital allocator, and I think it's, ah, it's very, very helpful to do so. Financial ratios that could be thought of as a distillation of the business into the most relevant bits of information. You can take a really complex thing, even the big, complex giant company like Amazon Apple, and look at 10 or 15 fanfare ratios and get a really good idea in just a few minutes about whether or not it's a good investment candidates. So, I mean, that's a pretty extraordinary thing. Is a very powerful tool if you think about it that way. So it could be thought of kind of like staffs of a company, kind of like, you know, you keep track of, ah, stats of a baseball team or an athlete. You look at these stats of a company and it tells you how well they're performing, How well do you think that they're gonna continue to perform? And what's the value of that performance? That's the way that we think about investing. So try to ignore a lot of the noise that's in the in the news. That's just out there. You know, you could read two articles about one business. Whatever you say. Sell, sell, sell. It's a terrible time for this company. Another one you can read say. Actually, I think it's a great company by it. It's so confusing. So you need to be able to have the tools to make your own decisions. Use your own judgment to say this company is probably a very solid investment, and I'm gonna buy it based on my understanding of finance. And I hope that this course helped you guys gain that understanding. And so with that, I'm gonna sign off and, uh, happy hunting with your investments and good luck with your, um, wealth building and your journey towards financial independence