Use the worksheet below to determine if a company has the coveted Durable Competitive Advantage. Calculate the ratios and equations using the values found in the company's financial statements. Read everything and anything about the company. Understand its business and how it makes money. We also prefer to invest in companies that pay dividends.
Introduction
The Rundown:
| Basic Information | |||
| Company Name | Ticker Symbol | ||
| Date of Analysis | Value of Investment | ||
| Weight of the Investment | ||
| Large | Mid-Size | Small |
Understand the Business
Is the company very well known or has a recognizable brand name?
What does the company do and how does it make money?
Does the company pay dividends?
Determine if the Company has Good Management
Who is the CEO and Chairman of the company? Who are its Board Members?
Is the CEO, Chairman, and Board Members smart? Are they dumb? Are they innovative and productive? Or are they old and obsolete?
Google or find YouTube videos of the CEO, Chairman, and Board Members. Do you like their face? Is your gut feeling about them good? Or bad?
Does the company's management look out for the interest of shareholders? Or are they greedy? And they are in it for themselves?
Checkmark the Durable Competitive Advantage Characteristics of the Business
| Durable Competitive Advantage Characteristics of the Business | |||
| Sell a product or service that is a basic necessity | Is in an industry with very little competition | ||
| Sell a unique product that doesn't change much | Provides a unique service that's difficult to replicate | ||
| Is the low-cost buyer and seller of products the public constantly needs | Spends very little or none at all on research and development | ||
Look for a Durable Competitive Advantage Using the 10 Year Summary
| 10 Year Summary | ||||
| Year | Revenue | Net Income | Earnings Per Share | Retained Earnings |
| 1 | ||||
| 2 | ||||
| 3 | ||||
| 4 | ||||
| 5 | ||||
| 6 | ||||
| 7 | ||||
| 8 | ||||
| 9 | ||||
| 10 | ||||
Strength of Durable Competitive Advantage
If the company's 10 Year Earnings Per Share is rising, it means the company may have a Durable Competitive Advantage. In that case, we should analyze the company's Financial Statements to find out the strength of the company's durability. If the company's earnings is erratic; going through periods of losses or no profitability, then the company most likely does not have what we are looking for. In that case, stop here, there is no point in proceeding.
Value and Growth Analysis
Highlights of my Analysis:
| Value and Growth Analysis | |||
| Price to Earnings Ratio | Price to Book Ratio | ||
| 10 Year Growth Rate of Earnings/Share | 10 Year Growth Rate of Dividends | ||
| Equity Bond Theory | Municipal Bond Rate | ||
| Current Stock Price | Relative Value | ||
| Projected 10 Year Stock Price | Projected 10 Year Annual Return | ||
| Projected 10 Year Gain | Projected 10 Year Fold Increase | ||
Analysis of Income Statement
Highlights of my Analysis:
| Durable Competitive Advantage Thresholds (Income Statement) | |||||
| Year | |||||
| Gross Profit Margin | |||||
| Selling/General/Admin to Gross Profit | |||||
| Research and Development to Gross Profit | |||||
| Business Cost to Gross Profit | |||||
| Depreciation/Amortization to Gross Profit | |||||
| Interest Expense to Operating Income | |||||
| Operating Income x Tax Rate | |||||
| Income Taxes Paid | |||||
| Operating Income x Tax Rate = Income Taxes Paid? | |||||
| Net Profit Margin | |||||
Analysis of Balance Sheet
Highlights of my Analysis:
| Economic Collapse Thresholds (Balance Sheet) | |||||
| Year | |||||
| (Net Income + Cash)/(ST & LT Debt Due) | |||||
| (Net Income + Cash + Retained Earnings)/(ST & LT Due) | |||||
| (Net Income + Cash + Retained Earnings)/(Current Liabilities) | |||||
| Short Term Debt to Long Term Debt | |||||
| Long Term Debt to Net Income | |||||
| (Total Debt + Capital Expenditures)/Net Income | |||||
| Adjusted Current Ratio | |||||
| Business Efficiency Thresholds (Balance Sheet) | |||||
| Year | |||||
| (Property/Plant/Equipment)/Net Income | |||||
| Return on Property/Plant/Equipment | |||||
| Return on Equity | |||||
| True Return on Equity | |||||
| Return on Assets | |||||
| Total Equity > 0? | |||||
| If (Total Equity < 0), is Net Income Increasing? | |||||
| Durable Competitive Advantage Thresholds (Balance Sheet) | |||||
| Year | |||||
| Total Receivables/Revenue < Competitors? | |||||
| Total Inventory is Increasing? | |||||
| Goodwill is Increasing? (Google what the company's acquisitions are) | |||||
| Intangibles + Estimated Value of Brand Name | |||||
| Long Term Investments (Google what the company's long term investments are) | |||||
| Total Assets, is it a Huge Number? | |||||
| Adjusted Debt to Equity | |||||
| Preferred Stock: (Redeemable + Non Redeemable) = 0? | |||||
| Retained Earnings is Increasing? | |||||
| |Treasury Stock| is Increasing? | |||||
| Price to Book Valuations (Balance Sheet) | |||||
| Year | |||||
| Price to Book Value | |||||
| Price to True Book Value | |||||
Analysis of Cash Flow Statement
Highlights of my Analysis:
| Durable Competitive Advantage Thresholds (Cash Flow Statement) | |||||
| Year | |||||
| Capital Expenditure/Net Income < 50 Percent? | |||||
| Issuance (Retirement of Stock) < 0? | |||||
| Issuance (Retirement of Debt) < 0? | |||||