Working Capital vs Current Ratio – Don’t Calculate WC the Wrong Way!

There’s a subtle difference between working capital and current ratio. Though both can be calculated from the same place in the balance sheet, they are not one and the same. Working capital and current ratio paint two separate pictures about a business. To understand those pictures, we need to know the subtleties of each formula. […]

Depreciation Expense: How to Decode

Updated 8/7/2023 Depreciation is an accounting term that has a big impact on a company’s future profitability. It is a controversial topic because, as Warren Buffett states in many shareholder letters, it is unquestionably a proxy for required capital expenditures. Buffett includes depreciation in his owner’s earnings calculations and why most free cash flow calculations […]

The Basics of Computer Software Depreciation – Common Q’s Answered

Updated 9/25/2023 Some parts of GAAP accounting rules can be more tricky, and software and how it is depreciated can be one of those. Most software is depreciated over a useful life, but there can be a type of software that is not depreciated (if it is considered R&D software). First, let’s talk about depreciation […]

Simple Balance Sheet Structure Breakdown (by Each Component)

Updated 6/3/2024 “Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets.” Peter Lynch The ability to read a company’s financials, such as the income statement, balance sheets, and cash flow statement, is a key data source for investors, both do-it-yourselfers and institutional investors. […]

Types of For Sale Securities and Their Accounting Treatment (AFS/HTM/HFT)

Updated 12/19/2023 Have you wondered what all those assets on an insurance company’s balance sheet were? Or why do companies carry such a large mix of marketable securities? Did you know that Microsoft owns over $120 billion in short-term investments, over 70% of its current assets, and over 39% of its total assets? That is […]

Changes in Working Capital: An Easy Walk Through

Updated 3/6/2024 Changes in working capital help explain how a company uses its assets to generate growth. Some companies build inventories, pay down liabilities, or extend their repayments to vendors to growt their cash flows. The better we understand how a company uses its assets and liabilities, the better we can predict changes in value. […]

SEC Form 4 Explained for Beginners

Updated 2/7/2024 One of the best ways to track how management feels about their company is to watch for insider buying or selling. Form 4 can help you determine any trades leadership makes regarding stock options. With the increase of pay for insiders (C-suite) in the way of stock options, tracking their moves can give […]

Run Rates: Key Metric for Quantifying Growth for Young Companies

Updated 4/28/2023 “Baby, we were born to run.” Bruce Springsteen, Born to Run lyrics With the booming stock market and the focus on exploding revenue growth, run rates and calculating them, plus their uses, is a timely metric to understand. Every quarter, companies hold earnings calls with analysts, which allow investors to hear from the […]

Share Based Compensation Expense – How to Locate it in the 10-k

Today, share-based compensation issued to employees continues as one of the more disruptive finance topics, and some C-suite managers have abused their positions. Those behaviors have led many in Congress to believe that this type of compensation harms investors and employees. The idea of a “golden parachute” remains reviled and looked down on. In most […]

Understanding Provision for Income Taxes and International Taxes

Provision for Income Taxes is a line item in a company’s Income Statement which tells investors how much a company pays in taxes for a given Fiscal Year. By looking closer in a company’s Notes to Financials, the investor can get clarity on additional details of the Provision for Income Taxes—such as which amount is […]

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