Long Term Mindset on LinkedIn: Charlie Munger's Investing Checklist: 📉 Risk ☑ Incorporate an… (2024)

EBITDA vs NET INCOME vs FREE CASH FLOWWhat's the difference?EBITDA:Measures the amount of operating profits a company generates from its core operations, excluding the impact of financing decisions, tax regulations, and non-cash expenses.NET INCOME:Measures the amount of net profits a company generates using accrual accounting after deducting all business expenditures.FREE CASH FLOW:Measures the amount of cash a business generates using cash accounting after subtracting all operating expenses and capital expenditures.FOUND ON 🔎EBITDA = Income Statement + Cash Flow StatementNET INCOME = Income StatementFREE CASH FLOW = Cash Flow StatementFORMULA ⚖EBITDA = Net Income + Interest + Taxes + Depreciation + AmortizationNET INCOME = Net IncomeFREE CASH FLOW = Cash From Operating Activives - Capital ExpendituresPROS ✅EBITDA-Shows a company's ability to generate operational profits without the impact of financing, taxes, and non-cash items.- Provides a way to compare the operational profitability of companies with different capital structures.NET INCOME- Incorporates all expenses using accrual accounting- Gives a complete picture of profitability.- Widely used and accepted method of measuring profits.FREE CASH FLOW- Measures how effectively a company is at generating cash.- Indicates the cash available for dividends, debt repayment, and reinvestment.- Provides an alternative way to measure profits.CONS ❌EBITDA- Ignoring interest, taxes, and non-cash charges can paint an overly optimistic picture of a company’s profits, especially for capital-intensive businesses.- Companies with a lot of debt or significant capital expenditures appear more profitable than they really are.NET INCOME- Expenditures such as one-off gains or losses, changes in tax laws, or restructuring costs can distort net income.- Different financing structures and tax jurisdictions can make comparisons between companies and industries difficult.FREE CASH FLOW- Can be significantly impacted by capital expenditure decisions, which may vary widely from year to year.- Requires a deeper understanding of the nuance of accounting.What's your favorite way to measure profits? Let me know below!***➕ Follow Long Term Mindset for more content like this.Want to master the basics of accounting (for free)?Enroll in our email-based course: Financial Statements SchoolGet started here (It's free) → https://lnkd.in/eKbRV7g6If this post was helpful, repost it ♻️ to share with your audience.

4

1 Comment

6 Types of Finance ProfessionalsPost by: Aleksandar Stojanovic, MSc. - Follow him!Are you aligned with your financial role?Is your team leveraging its strengths?In the financial sector, different roles come with unique responsibilities and skillsets.Here's a brief insight ⤵️• 𝗖𝗙𝗢𝘀 are heavily invested in strategic planning, leadership, and risk management, often overlooking the entire financial spectrum.• 𝗖𝗼𝗻𝘁𝗿𝗼𝗹𝗹𝗲𝗿𝘀 play a key role in accounting, financial reporting, and regulatory compliance, ensuring financial integrity.• 𝗙𝗣&𝗔 𝗠𝗮𝗻𝗮𝗴𝗲𝗿𝘀 focus on financial modeling, analytical skills, and business acumen to drive business growth.• 𝗜𝗻𝘁𝗲𝗿𝗻𝗮𝗹 𝗔𝘂𝗱𝗶𝘁𝗼𝗿𝘀 specialize in risk management, regulatory compliance, and analytical tasks to ensure internal control.• 𝗙𝗶𝗻𝗮𝗻𝗰𝗲 𝗔𝗻𝗮𝗹𝘆𝘀𝘁𝘀 are adept at financial modeling, analytics, and reporting to support data-driven decisions.• 𝗔𝗰𝗰𝗼𝘂𝗻𝘁𝗮𝗻𝘁𝘀 emphasize accounting skills, financial reporting, and regulatory compliance for precise record-keeping.Generally, CFOs and FP&A Managers might spend more time connecting to business stakeholders for strategic decisions, while Controllers and Internal Auditors focus more on regulatory and compliance tasks.Finance Analysts and Accountants are more involved in financial modeling and reporting.These titles and responsibilities can be interchanged in some job descriptions, and the weight of these skills also depends on the industry and project.But this breakdown is still quite helpful when planning career paths or understanding the roles within a finance department.***➕ Follow Long Term Mindset for more content like this.Want to master the basics of accounting (for free)?Enroll in our email-based course: Financial Statements SchoolGet started here (It's free) → https://lnkd.in/eKbRV7g6If this post was helpful, repost it ♻️ to share with your audience.

58

2 Comments

6 CASH FLOW RATIOSEvery investor should know:1: CASH FLOW TO DEBT RATIOTotal Debt ➗ Cash Flow From Operations→Indicates how long it would take a company to repay its debt if it devoted all of its cash flow to debt repayment.2: OPERATING CASH FLOW MARGINCash Flow From Operations ➗ Net Revenue→Compares a company's operating cash flow to its net revenue over a specified period.3: FREE CASH FLOW YIELDFree Cash Flow ➗ Market Capitalization→Indicates how much cash a company generates relative to its market value.4: FREE CASH FLOW TO SALES RATIOFree Cash Flow➗Net Revenue→Indicates how much cash a company generates relative to its sales.5: FREE CASH FLOW CONVERSIONFree Cash Flow ➗ Net Income→Indicates the amount of net income the business converts into free cash flow6: PRICE TO FREE CASH FLOW RATIOMarket Capitalization ➗ Free Cash Flow→ Indicates how much the market values the company's free cash flow production.Which cash flow ratio do you use the most?For me, it's the Free Cash Flow Yield.***➕ Follow Long Term Mindset for more content like this.Want to master the basics of accounting (for free)?Enroll in our email-based course: Financial Statements SchoolGet started here (It's free) → https://lnkd.in/eKbRV7g6If this post was helpful, repost it ♻️ to share with your audience.

72

𝗧𝗵𝗲 𝗣𝗲𝗿𝗶𝗼𝗱𝗶𝗰 𝗧𝗮𝗯𝗹𝗲 𝗼𝗳 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗠𝗲𝘁𝗿𝗶𝗰𝘀Post credit by: Josh Aharonoff, CPA Go and follow him!where Chemistry meets Profitability (and much more)...📣 Help me spread Financial literacy by liking, commenting, and sharing this post!📣1️⃣ OCFOperating Cash FlowNet Income + Other Non-Cash Items - Changes in Working Capital2️⃣ FCFFree Cash FlowOperating Cash Flow - Capital Expenditures3️⃣ CCCCash Conversion Cycle Days of Inventory Outstanding + Days of Sales Outstanding - Days of Payables Outstanding4️⃣ NCFNet Cash FlowOperating Cash Flow + Investing Cash Flow + Financing Cash Flow5️⃣ DCFDiscounted Cash FlowCF1 / (1+r)1 + CF2 / (1+r)2 + ... + CFn / (1+r)n, where CF is cash flow, r is the discount rate, and n is the number of periods.6️⃣ PVPresent ValueCF / (1+r)^t, where CF is cash flow, r is the discount rate, and t is the number of periods.7️⃣ FVFuture ValueCF x (1+r)^t, where CF is cash flow, r is the interest rate, and t is the number of periods.8️⃣ PPPayback PeriodInitial Investment / Annual Cash Flow9️⃣CRCash Ratio(Cash + Marketable Securities) / Current Liabilities🔟 CBCash BurnCash from Operating Activities + Cash from Investing Activities1️⃣1️⃣ UFCFUnlevered Free Cash Flow:EBIT x (1 - Tax Rate) + Depr & Amort - CapEx - Incr in Net Working Capital1️⃣2️⃣ LFCFLevered Free Cash Flow:EBITDA - Taxes - Capital Expenditures - Changes in Net Working Capital - Interest Expense1️⃣3️⃣ GPGross Profit Total Revenue - Cost of Goods Sold (COGS)1️⃣4️⃣ EBITDAEarnings Before Interest Taxes Depr and AmortNet Income + Int Expense - Int Income + Taxes + Depr + Amort1️⃣5️⃣ EBITDA (M)EBITDA MarginEBITDA / Revenue1️⃣6️⃣ OINet Operating incomeGross Profit - Operating Expenses1️⃣7️⃣ NINet Income Total Revenue - Total Expenses1️⃣8️⃣ NIMNet Income Margin Net Profit / Revenue1️⃣9️⃣ GPMGross Profit Margin Gross Profit / Revenue2️⃣0️⃣ ROIReturn on Investment Net Profit / Total Investment2️⃣1️⃣ ROEReturn on EquityNet Profit / Shareholders Equity2️⃣2️⃣ ROAReturn on AssetsNet Profit / Total Assets2️⃣3️⃣ NOINet Other IncomeOther Income - Other Expense2️⃣4️⃣ EPSEarnings per Share (EPS) Net Profit / Total Shares Outstanding2️⃣5️⃣ OMOperating MarginOperating Income / Revenue2️⃣6️⃣ PEPrice-to-EarningsPrice per Share / EPS2️⃣7️⃣ ROCEReturn on Capital EmployedOperating Profit / Capital Employed…and many more!Follow Long Term Mindset for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience

11

The Investing Risk PyramidThe classic definition of risk is measured in volatility, which is how much and how quickly the value of an investment can change.According to this definition of risk, here's how various assets stack up:HIGHER RISK- Futures- Options- Unprofitable stocks- Junk bonds- Commodities- Crypto- Precious MetalsMEDIUM RISK- Growth stocks- Small company stocks- Medium-rated bonds- Mutual funds- Rental real estateLOW RISK- Blue chip stocks- Investment grade bonds- US Treasury bonds and notesLOWEST RISK- Savings accounts- Money market funds- CDs- US Treasury bills Fixed annuitiesWith that said, here are two quote about risk that everyone should keep in mind."Risk comes from not knowing what you're doing." -- Warren Buffett"The biggest, least mentioned risk of all -- is not taking enough risk." -- David GardnerDo you think volatility is a good measure of risk?***➕ Follow Long Term Mindset for more content like this.Want to master the basics of accounting (for free)?Enroll in our email-based course: Financial Statements SchoolGet started here (It's free) → https://lnkd.in/eKbRV7g6If this post was helpful, repost it ♻️ to share with your audience.

165

7 Comments

The Financial Due Diligence ChecklistValuable post from Nevena Miskovic Follow her!All important FDD checks and insights are in one place.Hope this can help you improve your knowledge of FDD.🚀 𝗛𝗲𝗹𝗽 𝗺𝗲 𝘀𝗵𝗮𝗿𝗲 𝘁𝗵𝗲𝘀𝗲 𝗲𝘀𝘀𝗲𝗻𝘁𝗶𝗮𝗹 𝗰𝗵𝗲𝗰𝗸𝘀 𝘄𝗶𝘁𝗵 𝘁𝗵𝗶𝘀 𝗙𝗥𝗘𝗘 𝗖𝗵𝗲𝗰𝗸𝗹𝗶𝘀𝘁.𝗗𝗼 𝘆𝗼𝘂 𝗹𝗶𝗸𝗲 𝘁𝗵𝗲 𝗱𝗼𝘄𝗻𝗹𝗼𝗮𝗱𝗮𝗯𝗹𝗲 𝗣𝗗𝗙 𝘃𝗲𝗿𝘀𝗶𝗼𝗻? 𝗗𝗠 𝗺𝗲 𝗼𝗿 𝗰𝗼𝗺𝗺𝗲𝗻𝘁.𝗛𝗲𝗿𝗲 𝗶𝘀 𝘄𝗵𝗮𝘁 𝘁𝗵𝗲 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗗𝘂𝗲 𝗗𝗶𝗹𝗶𝗴𝗲𝗻𝗰𝗲 𝗖𝗵𝗲𝗰𝗸𝗹𝗶𝘀𝘁 𝗜𝗻𝗰𝗹𝘂𝗱𝗲𝘀:▶️ General checks▶️ Analytical procedures▶️ Internal controls check▶️ Property, plant, equipment, and intellectual property checks▶️ Inventories check▶️ Account receivables check▶️ Revenues check▶️ Loans and interest expenses check▶️ Account payables check▶️ Commitments and contingencies check▶️ Salaries, employee costs check▶️ OPEX check▶️ Equity check▶️ Loans and financial liabilities check▶️ Intercompany transactions checkFollow Long Term Mindset for more content like this.***P.S. Want to master the basics of accounting (for free)?I created a 5-day, email-based course that explains the Balance Sheet, Income Statement, and Cash Flow Statement in plain English.Check it out here (It's free) → https://lnkd.in/eKbRV7g6If you found this post useful, please repost ♻️ to share with your audience

108

7 Comments