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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.


Hewitt
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