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I have a spreadsheet that I use to quickly calculate the 30-second tests that IETC recommends. How useful are these tests? What do they tell me? Do I absolutely need to do the full-bore def. and ent. income statements?

Thanks for reading.
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What do they tell me?

Read pgs. 42-51 of IETC.

Do I absolutely need to do the full-bore def. and ent. income statements?

Read pgs. 63 and 79.
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Thanks for the quick reply, Hewitt.

Pages 42-51 of your book talk about the 5-minute test. Good stuff, but I'm more concerned with the 30-second tests you referenced on pages 63 and 79.

Those tests are very simple to do, and so my question was: how valuable are the results from the 30-second tests? If they are as good or nearly as good as the full-blown income statements, then I'll just use them. If they are not as good, or don't tell me the same/requisite information, or are simply not useful, then I won't rely on them.

How would you want your readers to view and/or use the 30-second tests?
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It's been awhile since I've read the book, but I believe Hewitt intended the 30 second test to just be an initial screen to see if a particular company warrants going through the more detailed, time consuming IETC analysis. Without a full time research team one could never properly analyze every company at every quarterly update with IETC or any other type of fundamental analysis.

The 30 second test produces some strong No's and some definite Maybe's at a glance. But it is not a substitute for doing full due diligence.

BBQ
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Pircdefense,

Now I have a better sense of your question.

In my full-fledged defensive income statement, I depreciate acquisitions over 5 years. So if a company spends $1 billion to buy another company, I deduct $200 million a year for the next five years. In the 30-second version, the cash cost of acquisitions are omitted (unless, of course, you add an expense line yourself.)

In the enterprising income statement, a key difference is the depreciation period for intangibles. The 30-second version includes the direct cost of R&D or advertising, whereas the bigger model expenses them over their useful life.

These are two differences that quickly come to mind.

I like to use the bigger income statements because I find it useful to look at how a company has performed over the last several years. But you also want to fast-forward past companies of marginal interest. Thus, use both (all four) versions. In this business we can't be too careful.

If I didn't answer your question fully, please let me know. However, I will be away from Earnings Power headquarters for the next few days.


Hewitt

p.s., Thanks for buying the book!
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Thanks for your reply, Hewitt, and for clarifying your answer.
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Thanks for writing that book.

I received my copy in the mail about a week ago. I am now reading the book for the second time and trying to understand the data inputs for a company I am studying.

I don't think I understand Sec 123R expenses very well. Will these/should these 123R expenses change any data input?


I like the 30 second tests!

Jean
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