1/12 Today's short thread will cover ROIC or return on invested capital and one of the ways I like to calculate the ratio.

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

🧵⬇️ 2/12 "A company creates value when the present value of the cash flows from its investments are greater than the cost of the investments. In other words, one dollar invested in the business becomes worth more than one dollar in the market."

Michael Mauboussin

Shareholder yield > dividend yield

Most of us know dividend yield.

Few of us know shareholder yield.

Let's learn more. Shareholder yield is a financial metric measuring the amount of capital returned to shareholders through various means, including dividends, share buybacks, and debt reduction.

It's a comprehensive way of looking at how much cash the company is returning to its shareholders.

Free cash flow is the lifeblood of every company.

To invest, we MUST understand how to analyze.

Here are 6 ratios to help.

Let's learn more 1️⃣Price to Free Cash Flow

P/FCF = Market cap / Free Cash Flow

Tells us how much the market values the company's free cash flow generation. Great substitute for P/E ratio.

The lower, the cheaper.

Looking for investment ideas?

Try these 5 easy hacks

🧵⬇️ 1️⃣Research industries you love.

For example, I love the payments industry, so I can explore biz like $PYPL, $ADYEY, and $V

You can do this with anything, SAAS, cloud, coffee, and railroads, the world is your oyster. Let your imagination guide you.

What is a bond yield?

How do bond yields work?

It's easier than you think.

Let's learn a little something 🧵⬇️ A bond yield measures the return an investor can expect from a bond.

It represents the income generated by the bond as a percentage of its current market price.

You can think of it as a dividend you receive for letting them borrow your money.

What is an income statement?

An Income Statement is just a 𝘳𝘦𝘤𝘰𝘳𝘥 of how much money a business made (or lost) during a particular period of time -- eg, a quarter or a year.

Let's learn more. ⬇️🧵 A formula you could use to think about the income statement:

Profits = Revenues - Costs

Valuing companies is tough.

The Price/Free cash flow can help beginners find great companies for a wonderful price.

Below we have 5 key takeaways to consider when using P/FCF The P/FCF ratio is a valuation measure that helps investors assess the relationship between a company's market share price and free cash flow.

1/9 Today's show thread will focus on Free Cash Flow to the Firm (FCFF).

FCFF represents the base of most calculations using a DCF to value a company.

Below we will uncover how to calculate FCFF.

🧵⬇️ 2/9 FCFF represents the amount of cash flow available to shareholders after we account for depreciation, taxes, working cap, & investments.

Many would argue, including myself, FCFF remains the most important metric representing the fair value of Google, for example.

Moats explained simply.

Warren Buffett coined this important investing quality.

"The most important thing to me is figuring out how big a moat there is around the business. What I would love, of course, is a big castle and a moat with piranhas and crocodiles." In the world of businesses, a "moat" is something that a company has or does that makes it really hard for other companies to compete with them or take away their customers.

Cash flow is king

20 Must Know KPIs to master cash flow.

1. Revenue forecast = revenue y/y expected from business operations. 2. Gross Profits - Revenue less COGS (cost of goods sold)

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

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

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

What is Maintenance Capex?

This is one of the most misunderstood area in finance and hopefully we can help make it a bit clearer for everyone.

We have several ways to determine maintenance capex, let's take a look.

🧵⬇️ Buffett famously defines maintenance capex in his 1986 Letter as:

"the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume.”

1/7 Today we will take a look at the quick ratio, the more conservative indicator of a company's liquidity than the current ratio.

The name stems from the "quick" nature of the assets involved.

Short 🧵⬇️ 2/7 The quick ratio helps investors measure its ability to pay its current liabilities without needing to cash out its inventory or use additional debt.

The quick ratio is considered more "conservative" than the current ratio because of the assets involved.

https://twitter.com/1416134632815333378/status/1629149274532626432

What is a bond yield?

How do bond yields work?

It's easier than you think.

Let's learn a little something 🧵⬇️ A bond yield measures the return an investor can expect from a bond.

It represents the income generated by the bond as a percentage of its current market price.

You can think of it as a dividend you receive for letting them borrow your money.

1/7 All businesses need to invest to grow, even $AMZN.

Net working capital (NWC) helps us understand a company's liquidity, as well funding operations.

Joel Greenblatt uses it as part of his calculations for return on capital.

🧵⬇️ 2/7 There are a few ways to calculate NWC, let's look a three:

NWC = Current assets - current liabilities

or

NWC = Current assets (less cash) - Current liabilities (less debt)

or

NWC = Accounts receivable + inventory - accounts payable

1/7 How do you read a 10-k if you only have 30 minutes a day or less?

Reading the 10-k or other financial docs remain the #1 way to learn about a biz and investing.

Below is my method if I lack time.

🧵⬇️ 2/7 Step 1: Read the biz description. If I don't understand, I throw it in the too hard pile and move on to the next company.

If you don't understand how a company makes money we will struggle to analyze or value the biz. We don't have to swing at every pitch and we can move on.

Understanding free cash flow is vital for investors.

Professor Damodaran is the 🐐 of valuation.

He defines free cash flow into 2 types:

- Free Cash Flow to Equity
- Free Cash Flow to Firm

Let's learn more. This short thread will outline some important ideas.

For deeper understand, check out Professor's free classes on Yoube and his website, Damodaran.com

1/11 1. What is Free Cash Flow to Equity (FCFE) and why is it important in valuing companies?

FCFE represents the base of many calculations using a DCF to value a company.

Below we will uncover how to calculate FCFE.

🧵⬇️ 2/11 FCFE represents the cash flow available to shareholders after we account for capital expenditures and net debt issued.

Many argue, including me, FCFE remains the most important metric representing the fair value of Google, for example.

1/9 Today's show thread will focus on Free Cash Flow to the Firm (FCFF).

FCFF represents the base of most calculations using a DCF to value a company.

Below we will uncover how to calculate FCFF.

🧵⬇️ 2/9 FCFF represents the amount of cash flow available to shareholders after we account for depreciation, taxes, working cap, & investments.

Many would argue, including myself, FCFF remains the most important metric representing the fair value of Google, for example.

ROCE broken down

Discover the power of Terry Smith's favorite metric.

ROCE, or return on capital employed can help you find great potential investments.

Let's learn how below 🧵⬇️ Return on Capital Employed (ROCE) is a financial ratio that measures a company's profitability and efficiency in generating returns from the capital it employs.

What are changes in working capital?

Changes in working capital help explain how a company uses its assets to generate growth.

It also greatly impacts cash flows; let's look a little deeper.

🧵⬇️ So, what are changes in working capital, and what does it mean?

**Working capital is not changes in working capital.**

The simple definition of working capital is:

💰Current assets – current liabilities

Capital allocation is job number one for CEOs

How we can measure capital allocation?

Understanding ROIC is key.

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