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@ifb_podcast
Dave Ahern
$6.1M follower assets
Breaking down the stock market for beginners by using everyday language. Co-host the IFB podcast with Andrew Sather. LIke everyone, trying to get a little smarter everyday.
90 following1,074 followers
Want to Find a Fortress Balance Sheet?
Use these metrics to analyze balance sheets like a pro.

→ Current ratio > 1
→ Asset Turnover > 5%
→ Interest coverage > 5
→ Debt to Assets < 40%
→ Net debt to EBITA < 3
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How Do You Calculate Free Cash Flow?
How do you calculate free cash flow?

Free cash flow (FCF) we can define as net operating profit after tax (NOPAT) minus investments in future growth.

But what is NOPAT?

NOPAT equals Net Operating Profit after Taxes

The formula is:

NOPAT = EBIT x ( 1 - tax rate)
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EBITDA Is Not Cash Flow
EBITDA is not Free Cash Flow.

Here's why:

  1. Working capital changes impact cash flow.
  2. Real FCF reveals the true financial health.
  3. EBITDA includes interest and taxes
  4. Capex isn't figured in.

FCF tells you how much a company EARNS after all expenses, more reliable.
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How to Calculate Liquidity Ratios
Liquidity ratios are the lifeblood of financial health.

They help reveal a company's ability to meet short-term obligations promptly.

Let's learn how to calculate them.

Liquidity ratios are essential financial metrics that evaluate a company's capability to satisfy its short-term obligations.

They offer valuable insights into an entity's financial health, assisting investors, creditors, and management in assessing the firm's ability to cover immediate liabilities.

In this post, we will explore three critical liquidity ratios: the Current Ratio, Quick Ratio, and Cash Ratio.

  1. Current Ratio

The Current Ratio measures a company's capacity to meet short-term obligations with its current assets.

It is calculated by dividing current assets by current liabilities using the following formula:

Current Ratio = Current Assets / Current Liabilities

  1. Quick Ratio (Acid-Test Ratio)

The Quick Ratio, also known as the Acid-Test Ratio, is a stricter gauge of liquidity as it includes cash and quivalents, marketable securities and accounts receivable. This ratio provides a clearer picture of a company's ability to meet its immediate liabilities with quick converting assets.

The Quick Ratio is calculated by dividing quick assets by current liabilities with the following formula:

Quick Ratio = (Cash & Equivalents + Marketable Securities + Accounts receivable) / Current Liabilities

  1. Cash Ratio

The Cash Ratio is the most conservative liquidity ratio, focusing exclusively on a company's ability to satisfy short-term obligations with its cash and cash equivalents.

Cash Ratio = (Cash and Cash Equivalents+ Marketable Securities) / Current Liabilities

So what are good ratios?

Good question.

The ideal current, quick, and cash ratios can vary by industry and company circumstances, but generally:

  1. Current Ratio: A ratio of > 2

  1. Quick Ratio: A ratio of > 1 ypically a good benchmark.

  1. Cash Ratio: A ratio of 0.2 to 0.5 is generally viewed positively.

Thanks for reading and I hope you find some value here.
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FCFF vs FCFE
Free cash flow is all that matters.

Valuing companies can be a challenge.

Which do you use?

FCFF vs FCFE

An overview below
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8 Books For Beginning Investors
Below we have 8 books to help get you started investing (and give you a head start on everyone else.)

What else would you add?
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The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On with Your Life
+ 1 comment
Warren Buffett and the Margin of Safety (A Story)
Warren Buffett sat in the dimly lit corner of the Omaha bar, nursing a bourbon. The clinking of glasses and hushed conversations formed a backdrop, but he was lost in thought, reminiscing about a lesson he had learned early in his investing career—the margin of safety.

In his younger days, he had been eager, like a bull charging into the market. On one fateful day, he had come across a stock that seemed like a sure bet. The crowd was abuzz with excitement, and everyone was buying in. The stock's price soared higher and higher, like a rocket reaching for the stars.

But Buffett had hesitated, recalling the words of his mentor: "Invest with a margin of safety, my boy. Always leave room for the unexpected."

As the stock continued its meteoric rise, he felt the pressure to join the frenzy. Yet, something held him back—the margin of safety. Instead, he watched from the sidelines, his hard-earned dollars safely tucked away in more conservative investments.

Then, it happened. The market trembled, as if nature itself had sent a warning. The company he had contemplated investing in revealed a scandal that sent its stock crashing down. Panic ensued, fortunes were lost, and lives were upended.

Buffett, with his margin of safety intact, remained unscathed. He had not gambled his wealth on the hope of quick riches. He had invested with prudence, ensuring that even if things went awry, he would have a safety net.

As he sat in that bar, he couldn't help but think of those who had ignored the wisdom of a margin of safety. They had danced on the edge of a precipice, driven by greed and impatience. And when the ground crumbled beneath them, they fell into the abyss of financial ruin.

Buffett knew that investing was not a sprint but a marathon, a patient and methodical journey. The margin of safety was his guiding star, ensuring that he would weather the storms of the market. It was a lesson he carried with him throughout his illustrious career.

He raised his glass to the memory of that lesson and silently thanked his mentor for the sage advice. In the world of investing, as in life, prudence and caution were virtues that could make the difference between success and disaster.

The bar chatter continued around him, but Warren Buffett, the Oracle of Omaha, remained steadfast in his commitment to the margin of safety. It was a simple yet profound principle that had served him well—a lesson learned early, never to be forgotten.

Thanks for reading and I hope you enjoyed my little trip down story lane.
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Defining NOPAT
Free cash flow is the lifeblood of every company.

NOPAT remains one of the most important metrics in finance

It leads to both FCF and ROIC:

FCF = NOPAT - New invested capital
ROIC = NOPAT / Invested Capital
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Differences Between Market Cap and Enterprise Value
What is Market Cap?

What is Enterprise Value?

Here is a great starter to understand the differences between the two.
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