Skip to main content
Message Font: Serif | Sans-Serif
No. of Recommendations: 12
Daniel has built an impressive spreadsheet (although I have not double-checked every calculation.) I see that he has the return on greenest dollar calculation, which is one of the best ratios you can use and yet it gets very little attention in the media (good for us). I find that a 3-year RGD version is also helpful, because it smoothes out annual results that may not be representative of a firm's long-term performance. Thus, use a 1- and 3-year version and compare the two. Also, look at the trends. If per-share accrual profits (EPS) are rising but RGD is trending down, figure out why.

In addition to all the excellent pages that Daniel put in his spreadsheet, you may also want to add a few others. In my version, for example, there is a blank page for notes for the last 5-6 years of letters to shareholders. I'll read the 1999 letter and then jot key items in the '1999' column. Then repeat for 2000-2003. This way you see whether a CEO's grandiose plans bore fruit.

Also, I have all my calculations on a 'calculations' page. And every calculation is shown line-by-line. This makes it easier to find mistakes (like having data from column C in column D). It happens...take my word for it!

If you are really energetic, create a page where the 3 P&L's side by side. Thus, if there is a large variance between the accrual income and one of our alternate ledgers, then you can systematically work from top (revenue) to bottom (per-share earnings) to pinpoint the reason. Is the discrepancy due to cost of capital? High investment in fixed capital? Working capital is a source of cash? When the P&Ls are side by side, you will know.

I know this sounds like a lot of work, but it forces you to really examine a firm's earnings quality. And the better you know the finances, the greater your investing confidence and portfolio results.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.