Why Liquidity Ratios Are Important, With Examples Using Real Companies

In times of financial uncertainty, finding companies with a good amount of liquidity provides a margin of safety. Companies in good shape regarding liquidity can react to any crisis by taking advantage of opportunities. Beyond safety, the two reasons above help explain why Berkshire Hathaway carries so much cash on its balance sheet. The current […]

Applying the Lessons of Enron’s Mark-to-Market Accounting Scandal Today

It may be surprising, but companies today are still using the same mark-to-market accounting that led to Enron’s fraud and bankruptcy in 2001. Mark-to-market accounting is a special way to record assets on a balance sheet. I will try to explain the basics as simply as possible. While it’s hard for any investor to predict […]

BVPS: How Valuable is it to Know the True Value of a Stock?

The book value per share (BVPS) ratio compares stockholders’ equity to the total number of outstanding shares. In other words, this calculates a company’s per-share total assets less total liabilities. Value investors have traditionally embraced book value per share as a method of valuing different investments. Benjamin Graham, the founder of value investing, developed what […]

Everything to Know on ROA, with Average ROA by Industry Data

The return on assets remains a useful measure for investors to understand. The formula offers a great way to measure the performance of management and generally is used to compare different companies in the same industry and how the company uses its assets. In our continuing profitability ratio series (ROE and ROIC), we will dive […]

Historical S&P 500 Industry Weights – [20 Year History]

If you’re benchmarking to the S&P 500, then it helps to know the context of your industry weighting compared to the index. It can help to explain your portfolio’s relative performance. It can also create a “heat check” to how your portfolio is balanced, and how it might react to an upcoming economic cycle. Before […]

Diluted EPS Meaning Explained with a Simple Infographic

Take a look at any income statement and you’ll see EPS (or Earnings Per Share) divided into two categories: diluted EPS and basic EPS. Which EPS figure should you rely on, and what do those terms mean? The infographic below summarizes it simply: EARNINGS PER SHARE EPS = Earnings / Shares Outstanding DILUTED EPS Uses […]

Beginner’s Guide to the Price to Book Ratio

“Price is what you pay. Value is what you get.” –Warren Buffett The price-to-book ratio remains a top valuation metric for certain companies like banks, insurance companies, or railroads. Numerous variables influence the choice to purchase a certain stock. Of course, the first factor is how well the underlying business does. Equally crucial is determining […]

Everything to Know about ROE, with Average ROE by Industry Data

“Focus on return on equity, not earnings per share.” –Warren Buffett One of my favorite Buffett quotes of all time. Focusing on the returns on equity, and not earnings, forces us to recognize the company’s performance in managing their capital versus strictly the earnings and nothing else. Buffett likes to compare stock returns to the […]

What’s a Good PEG Ratio? It Depends. Simple Pitfalls to Avoid

Conventional wisdom says that a good PEG ratio is anything below 1. But actually, there’s a lot that can go wrong with that assumption! The PEG ratio is a shortcut for determining how cheap a stock is relative to its growth. The lower the PEG, the cheaper a stock is trading (relative to its earnings […]

6 Examples of Negative Earnings Leading to Bankruptcy in the Stock Market

I’ve had the controversial take that investors should avoid stocks with negative earnings. This is because my research into the biggest bankruptcies of the 21st Century showed that negative earnings was the #1 most common characteristic of companies in the year before bankruptcy. The following are snippets from my book Value Trap Indicator, which examined […]