Gross Profit Margin

The gross profit margin refers to the dollar value of sales less cost of sales. A common mistake is to compare it to contribution margin. It is strictly a financial value directly tied to two unique financial items: net sales and cost of sales. Contribution margin is a function of the sale of single unit.

The gross profit margin is always stated in dollars. The alternative is the gross profit percentage which denotes the percentage of gross profit against net sales. A sophisticated user of this term understands that it is a function of net sales and stated in dollars.

Value Investing – Principle #3: Financial Analysis (Lesson 8)

Value Investing

Financial analysis is the basis to set up a predictable and reasonable market price for the respective stock. This becomes the sell price point or what is often referred to in this series of lessons as the recovery point. If all three forces (economic, industry and company level) are performing reasonably, then the stock price for the company will recover to this sell point within a short period of time. Therefore, it is important for value investors to understand the importance of having knowledge about financial analysis.

Financial analysis is an assessment of a company’s performance in the form of dollars. The goal is to establish a trend line of financial accomplishments. It is safe to assume that the historical results can predict future results with accuracy. Again, large corporations are money generating machines; it will take several adverse actions to slow down or diminish the ability to earn profits.

Financial analysis starts with gathering research data, specifically annual and the most recent quarterly financial reports. With this information, certain data is loaded into a spreadsheet so that ratios can be determined. With the spreadsheet data, trends are tracked and from there, summarized. This summary of pertinent outcomes assist the value investor with determining the most likely outcomes for the next several quarters. Take note, value investors are not as interested in extended time frames as this methodology is designed to determine an expected recovery value for the stock in the short-term. Value investors are not interested in holding to collect dividends, there are interested in the buy low, sell high tenet of business. Thus, long-term expectations are irrelevant.

Other key information is extracted from the quarterly and annual reports to confirm trends, validate business ratios and finally, determine the expected market recovery price.

Value Investing – Holistic Approach (Lesson 4)

Value Investing

There are several underlying elements that make value investing so successful. Value investors cover all the respective elements no differently than how many people thoughtfully resolve problems. An holistic approach towards investing is utilized. This refers to to gaining an understanding of the respective industry and its members; i.e. understanding what makes the pool of investments work. Next, value investors identify key indicators of success and for comparison among the members of the pool of potential investments. Discovering why one member is so much more successful than others allows the value investor to gain perspective and use this to fully understand operations of all members of the pool of investments. With this knowledge, it is easy to develop a set of financial metrics that quantifies or ranks the respective members in the pool. This ranking is essential with establishing the respective buy/sell points. Finally, each member’s intrinsic value quantifies the overall desirability of the respective company. Now it is merely a process of enacting the model and allowing the model to do its job.

Railroad Stocks – Analysis 02/15/2020

Every one of the six railroad stocks are at or above their all-time highs. As of today, February 15, 2020, the various stock prices are as follows: Union Pacific 184.65; Norfolk Southern $206.85; Canadian National $93.93;
Kansas City Southern $173.64; Canadian Pacific $270.86; CSX $79.59.

In addition, the price to book ratios are also higher than last quarter. The key question: is there any value in any of the stocks? To do this, a table of various preferred ratios must be prepared and explained in a write-up. 

Two critical points of information are evaluated, both the gross profit margin and operational cash flow per share are explained in this article.

Railroad Stock Investments – The Standard of Measurement to Buy and Sell Railway Stock

The transportation sector of the United States economy is composed of nine industrial groups. One particular group moves more volume of tonnage based on ton miles than any other form of transportation – Railroads. In accordance with the Federal Department of Transportation, railroads move 39.5% of all freight in the US (based on ton miles which is the length freight travels). It’s a $60 Billion industry with over 140,000 miles of track. It is dominated by seven major carriers (referred to as Class I Railways).

Railroad companies are an excellent group of investments for several reasons. First, this is a highly stable and regulated industry. Secondly, there are a limited number of railroads, in effect, the threshold of entry for any new railways is impractical and financially capital intensive. Third, each company limits its revenue stream to transportation (there are some alternative sources of revenue but they are less than 5% of their entire total revenue). Every single member in this pool has a long history of positive earnings and superior cash flow.

Performance Ratios

Performance Ratios

The most common thought among business owners, consultants, investors and students is the ‘bottom line’.  The proper word is of course ‘PROFIT’.  In business, the single number one reason to operate is to make a profit. 

Gross Profit Margin

Gross Profit Margin

The difference between the sales price and the cost of the product or service rendered is known as gross profit margin in business. It is traditionally the amount identified on the income statement or a tax return as the amount earned after cost of sales a.k.a cost of goods sold, cost of services rendered, etc. is subtracted from sales (revenue).

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