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Type of Securities Investment Strategies Fundamental Analysis Technical Analysis
Understanding Financial Statements Income Statement Analysis Balance Sheet Analysis Cash Flow Analysis Shareholders' Equity Analysis Ratios and Definitions


Balance Sheet Analysis

 - Leverage and financial
   strength affect share value

 - Liquidity concerns can
   decimate a business

 - Cash is critical, to a point
    * Window Dressing
    * Cash Gap
    * Cash per Share
    * Burn Rate

 - Marketable Securities

 - Receivables are interwoven
    with cash flow
    * Past Dues and Write-offs
    * Receivables turnover ratios
    * Securitizations

 - Inventory - focus on the
    profit margins
    * Perpetual vs. Periodic
       Inventory
    * Inventory Accounting
       Calculation
    * Inventory Costing
        Methods
    * Lower of Cost of Market
    * Inventory Categories
    * Inventory Turnover Ratios

 - Fixed assets are necessary in
   order to be a world class
   company

 - Liabilities with equity attributes
   are enriching

 - Emphasizing debt net of cash
   can be misleading

 - Book value is a tool to
    properly evaluate a stock

 - Off-balance sheet assets and
   liabilities are legal

 

 


Inventory - focus on the profit margins

Inventories are those items that companies purchase or produce, for the express purpose of selling to customers for a profit. I have found over the years that, most investors think of inventory with a banker’s view, not a stockholder’s. People are generally skeptical of inventory values. Everyone has a story of buying something at 10% of its value.  These experiences have caused many investors to develop homemade “haircut” percentages that they apply to inventory balances, to try to understand what the liquidating value might be, if the company’s inventory was sold under distress conditions. This is a banker’s mentality on how to collect debt. Investors need to think like owners to make money in the stock market, not like bankers.

When buying common stock, investors usually pay for earnings and profitability margins and percentages. When evaluating inventories, investors need to be concerned with those same parameters. Beginning and ending inventories must be properly valued in order for gross profit margins to be correct. The profit margins ultimately determine earnings, price earning ratios and share price. If the profit margins change, then the valuation of the business also changes. While inventory dollar values are important, the associated effect on historical and prospective gross margin has a greater impact on one’s investment.

A write down of inventory will definitely reduce the current year’s earnings and equity, but one needs to understand what happened and focus on the recurring effect on margins.

Click here for information on:
-Perpetual vs. Periodic Inventory
-Inventory Accounting Calculation
-Inventory Costing Methods
-Lower of Cost or Market Rules
-Inventory Categories
-Inventory Turnover Ratio

 

 

 

 

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