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Income Statement Analysis

Income Statement Analysis Jonathan Poland

Income statements are crucial to understanding a company’s financial performance. An income statement, also known as a profit and loss statement, is a financial document that shows a company’s revenues and expenses over a specific period of time. It is used to calculate a company’s net income, which is the amount of money it made or lost during that period. The income statement is important because it provides investors and analysts with information about a company’s financial performance, including its ability to generate revenue, control costs, and make a profit. It is also used to assess the company’s liquidity, profitability, and solvency, which are important indicators of a company’s overall financial health.

Revenue
– Cost of Goods Sold
———————————-
Gross Profit

Operating Expenses
– Selling, General, Expenses
– Research & Development
– Depreciation
———————————-
Operating Profit

– Interest Expense
– Gain (Loss) Asset Sales
– Other
———————————-
Income Before Tax
– Income Taxes Paid
———————————-
Net Earnings

Revenue

The “top line” on the income statement is always revenue or sales, the amount of money that came into the business during the period, generally on a quarterly basis. If the business makes car parts, then the total revenue is based on how much it sold during the period. An important lesson to remember is that revenue does not equate to profit, which depend on the costs (aka expenses) tied to generating the revenue.

Cost of Goods Sold (COGS)

The lower the better is a good rule to follow. COGS also known as cost of revenue is an important metric of company health and key to determine gross margins when searching for long-term investments.

Gross Profit + Margin

Total revenue less the cost of goods sold equals gross profit. This number shows how well a company turns revenue into earnings. Alone the number tells relatively little about a company, but when taken against revenue, the gross profit margins tell investors a lot about a businesses worthiness.

Gross Profit = Revenue – Cost of Goods Sold

Gross Profit Margin = Gross Profit ÷ Total Revenue

Higher gross margins can signal competitively durable advantages. In other words, companies with high gross margins tend to have a narrow or wide competitive advantage.  Apple’s gross margin as of 2023 is 43%, if you need a reference.

Operating Expenses

Right beneath the gross profit on the income statement are operating expenses. These include all the costs tied to running of a business. From selling and administrative to research and development, depreciation, and others. Each of these line items should be judged against gross profits.

Selling, General, & Administrative: These include management salaries, advertising, travel, legal, commissions, payroll, and similar costs. Anything under 30% of gross profit is exceptional. Anything over 80% would be problematic.

Research & Development: Consistent businesses, even technology firms, do not generally need to reinvest heavily in R&D in order to stay competitive. If one does, or if any industry does, even if its market value is growing, that is a red flag. The one caveat is if this expense remains the same or decreases with technological advances.

Depreciation: Hard assets are a real cost of doing business that financiers can use to pile debt onto a company’s books. In calculating working capital, do not overlook this expense.

Interest Expense

When a company piles on debt, there is an expense for interest it pays out. The more debt, the more interest. Sometimes, companies can add debt at low interest rates when money is cheap. As a general rule of thumb, total debt to income should not exceed 5x in non-financial businesses. For most companies, paying less than 15% of operating income would be best.

Earnings (BITA + Net)

Income is what’s left after a company’s paid all its expenses have been paid. The approximate taxes paid by corporations that are publicly traded equates to around 30%. Individual situations may apply like how many companies use exotic tax structures to avoid paying them around the world. Net earnings matter in context of the businesses ability to use them to grow. Some companies grow top line fast as they learn how to control costs, only later becoming efficient. However, a good rule of thumb is to follow the earnings and don’t bet on companies losing money consistently.

Durable Competitive Advantage

Durable Competitive Advantage Jonathan Poland

The most important aspect of durability is market fit. Unique super simple products or services that does change much if at all over time and that do not need continuous investment to stay relevant are always better than the opposite. In some industries this is impossible to do. How to spot these kind of businesses? Here are some core traits to look out for.

  • Consistent Growth in Sales
  • Consistent Growth in Earnings
  • Consistent Growth in Book Value
  • Low Debt to Income Ratio (> 5)
  • High Return on Equity Average (+12%)
  • Low Operating Costs to Income (> 75%)
  • Low CapEx to Income (> 75%)
  • High Gross Profit Margins (+ 25%)

The Power of Compound Interest

The Power of Compound Interest Jonathan Poland

Traditional finance will explain compound interest as the interest paid on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. However, it is also the rate of return on an investment like a stock or real estate purchase.

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When interest is compounded on an investment, the interest earned in one period is added to the principal, so that the interest earned in the next period is based on a larger amount. The more frequently interest is compounded, the greater the amount of interest earned over a given period of time. For example, if an investment earns an annual interest rate of 5%, the interest earned in the first year is $50 on a $1,000 deposit. If interest is compounded annually, the deposit will be worth $1,050 at the end of the first year. If interest is compounded semi-annually, the deposit will be worth $1,025 after six months and $1,051.25 after one year.

Historically, home ownership has produced around 5% a year while the S&P 500 has generated around 10%. Over time, that 5% difference per year adds up to an incredible advantage for stock ownership over home ownership. Let’s just use the average mortgage term of 30 years at 5%. Let’s just say you pay cash for your house and it costs $300,000. In 30 years, with the historic compound interest rate at 5% for real estate, that home appreciates to $1.3 million. Do the same investment amount at 10% for an investment in the S&P 500 and that asset appreciates to $5.2 million. The difference is stark and significant. Let’s say you get 20% a year… that investment now becomes $71 million. Let’s say you get 30% a year… that investment now becomes worth $785 million. You get it.

There are a few key factors to consider when calculating compound interest:

  • Principal: The initial amount of money that is invested or borrowed.
  • Interest rate (or) Rate of Return: The percentage of the principal that is charged as interest.
  • Compounding frequency: How often the interest is added to the principal (e.g., annually, semi-annually, quarterly, monthly, daily, etc.).
  • Time: The length of time over which the interest is calculated.

In conclusion, Compound interest is the interest on interest, it can grow the investment at an exponential rate and can be favorable for both borrowers and savers. The calculation of compound interest depends on the principal, Interest rate, compounding frequency and time. There are many online calculators available to help with the calculation.

What is Intermittent Fasting?

What is Intermittent Fasting? Jonathan Poland

Intermittent fasting is an eating pattern where you cycle between periods of eating and fasting. It does not specify which foods you should eat, but rather when you should eat them. There are several different ways to do intermittent fasting, including the 16/8 method, the 5:2 diet, and alternate-day fasting. The 16/8 method involves skipping breakfast and only eating during an 8-hour window, such as from noon to 8:00 PM. The 5:2 diet involves eating normally for 5 days per week and restricting calories to 500-600 for the other 2 days. Alternate-day fasting involves alternating between days of normal eating and days of severe calorie restriction. Some people use intermittent fasting to try to lose weight, improve their health, or simplify their lifestyle. However, it’s important to speak with a healthcare professional before starting any new eating pattern, especially if you have any underlying health conditions.

Here is a sample meal plan for one week using the 16/8 method of intermittent fasting:

Monday:

  • Breakfast (8:00 AM – 12:00 PM): Skip breakfast
  • Lunch (12:00 PM – 1:00 PM): Grilled chicken salad with mixed greens, cherry tomatoes, avocado, and a vinaigrette dressing
  • Dinner (8:00 PM – 9:00 PM): Baked salmon with roasted vegetables and quinoa

Tuesday:

  • Breakfast (8:00 AM – 12:00 PM): Skip breakfast
  • Lunch (12:00 PM – 1:00 PM): Turkey and cheese wrap with lettuce, tomato, and hummus, served with a side of fruit
  • Dinner (8:00 PM – 9:00 PM): Veggie stir-fry with tofu and brown rice

Wednesday:

  • Breakfast (8:00 AM – 12:00 PM): Skip breakfast
  • Lunch (12:00 PM – 1:00 PM): Quinoa and black bean bowl with grilled vegetables and a side of guacamole
  • Dinner (8:00 PM – 9:00 PM): Grilled steak with sweet potato and broccoli

Thursday:

  • Breakfast (8:00 AM – 12:00 PM): Skip breakfast
  • Lunch (12:00 PM – 1:00 PM): Turkey and spinach salad with cherry tomatoes, feta, and a balsamic vinaigrette
  • Dinner (8:00 PM – 9:00 PM): Baked chicken with roasted vegetables and wild rice

Friday:

  • Breakfast (8:00 AM – 12:00 PM): Skip breakfast
  • Lunch (12:00 PM – 1:00 PM): Grilled shrimp and vegetable skewers with a side of quinoa
  • Dinner (8:00 PM – 9:00 PM): Vegetarian chili with cornbread

Saturday:

  • Breakfast (8:00 AM – 12:00 PM): Skip breakfast
  • Lunch (12:00 PM – 1:00 PM): Turkey and avocado wrap with lettuce and tomato, served with a side of fruit
  • Dinner (8:00 PM – 9:00 PM): Grilled pork chops with roasted vegetables and mashed sweet potatoes

Sunday:

  • Breakfast (8:00 AM – 12:00 PM): Skip breakfast
  • Lunch (12:00 PM – 1:00 PM): Black bean and corn salad with mixed greens, cherry tomatoes, and a lime vinaigrette
  • Dinner (8:00 PM – 9:00 PM): Baked salmon with roasted vegetables and quinoa

I hope this meal plan gives you some ideas for how to structure your eating during the week using the 16/8 method of intermittent fasting. It’s important to remember to drink plenty of water and stay hydrated throughout the day, and to listen to your body’s hunger and fullness cues. Don’t forget to also include snacks if you feel hungry outside of your designated eating window.

Here is a sample meal plan for one week using the 5:2 method of intermittent fasting:

Monday:

  • Breakfast (7:00 AM – 8:00 AM): Overnight oats with Greek yogurt, berries, and a drizzle of honey
  • Lunch (12:00 PM – 1:00 PM): Grilled chicken salad with mixed greens, cherry tomatoes, avocado, and a vinaigrette dressing
  • Dinner (6:00 PM – 7:00 PM): Baked salmon with roasted vegetables and quinoa

Tuesday:

  • Breakfast (7:00 AM – 8:00 AM): Scrambled eggs with spinach and whole grain toast
  • Lunch (12:00 PM – 1:00 PM): Turkey and cheese wrap with lettuce, tomato, and hummus, served with a side of fruit
  • Dinner (6:00 PM – 7:00 PM): Veggie stir-fry with tofu and brown rice

Wednesday:

  • Breakfast (7:00 AM – 8:00 AM): Greek yogurt with granola and a sprinkle of chia seeds
  • Lunch (12:00 PM – 1:00 PM): Quinoa and black bean bowl with grilled vegetables and a side of guacamole
  • Dinner (6:00 PM – 7:00 PM): Grilled steak with sweet potato and broccoli

Thursday:

  • Breakfast (7:00 AM – 8:00 AM): Oatmeal with banana and a drizzle of almond butter
  • Lunch (12:00 PM – 1:00 PM): Turkey and spinach salad with cherry tomatoes, feta, and a balsamic vinaigrette
  • Dinner (6:00 PM – 7:00 PM): Baked chicken with roasted vegetables and wild rice

Friday:

  • Breakfast (7:00 AM – 8:00 AM): Smoothie bowl with Greek yogurt, berries, and a sprinkle of chia seeds
  • Lunch (12:00 PM – 1:00 PM): Grilled shrimp and vegetable skewers with a side of quinoa
  • Dinner (6:00 PM – 7:00 PM): Vegetarian chili with cornbread

Saturday (fasting day):

  • Breakfast (7:00 AM – 8:00 AM): Skip breakfast
  • Lunch (12:00 PM – 1:00 PM): Cucumber and tomato salad with hummus and a side of fruit
  • Dinner (6:00 PM – 7:00 PM): Grilled chicken with roasted vegetables and quinoa (200 calories)

Sunday (fasting day):

  • Breakfast (7:00 AM – 8:00 AM): Skip breakfast
  • Lunch (12:00 PM – 1:00 PM): Grilled veggies with hummus and a side of fruit
  • Dinner (6:00 PM – 7:00 PM): Baked fish with roasted vegetables and quinoa (200 calories)

I hope this meal plan gives you some ideas for how to structure your eating during the week using the 5:2 method of intermittent fasting. On the two fasting days, it’s important to keep your calorie intake to a minimum, aiming for around 500-600 calories. On non-fasting days, you can eat normally, but be sure to still make healthy food choices and listen to your body’s hunger and fullness cues. Don’t forget to also include snacks if you feel hungry outside of your designated eating window.

Austrian Economics 101

Austrian Economics 101 Jonathan Poland

Austrian economics is a school of economic thought that originated in Austria in the late 19th century with Carl Menger, professor of political economy at the University of Vienna from 1873 to 1903. Later Fredrick Hayek, Ludwig von Mises, and Murray Rothbard would demonstrate the mastery Austrian style of analysis can have over today’s economy.

The theory is based on the idea that individuals, rather than governments or other large organizations, are the primary drivers of economic activity. Austrian economists believe that prices, wages, and other market signals reflect the underlying value of goods and services, and that these prices should be allowed to adjust freely in response to changes in supply and demand. They also place a strong emphasis on the role of entrepreneurship and innovation in driving economic growth. Austrian economics is often associated with classical liberalism and libertarianism, and it has influenced a number of economic theories and policies.

Some Axioms:

  • Human Action – All humans seek to improve their situation from their viewpoint.
  • Action Scarcity – The factors available for improving human’s situations are scarce.
  • Human Fallibility – Humans make mistakes.
  • Human Rationality – All humans are rational beings.
  • Action Time – All human actions take time.
  • Action Consequences – All human actions have consequences.
  • Action Choices – Humans choose those actions they believe will best improve their situation.
  • Action Ideas – The ideas human’s hold determine their actions.

Two important modern theorists in the Austrian school are Ludwig von Mises and Friedrich von Hayek. Mises received widespread attention from other economists in the 1920s with his challenge that socialism was totally impossible in a modern economy because of its lack of market prices, for him the indispensable means of rational resource allocation. Both Mises and Hayek have contributed significantly in molding the Austrian theory into an integrated whole. Their explanation of cyclical swings in business as resulting from uncontrolled credit expansion at the hands of government added another significant block to the Austrian structure.

Utilities Sector

Utilities Sector

Utilities Sector 2252 1500 Jonathan Poland

The utilities sector includes companies that provide essential services such as electricity, gas, water, and wastewater treatment. These companies are often regulated by government agencies, and their primary focus is on providing essential services to consumers and businesses. The performance of the utilities sector can be influenced by a variety of factors, including changes in energy prices, shifts in regulatory policy, and weather conditions. Some of the major companies in the utilities sector include Duke Energy, Southern Company, American Electric Power, and NextEra Energy.

Duke Energy is a leading electric power holding company that serves millions of customers in the United States and Latin America. Duke Energy owns and operates a diverse range of power generation assets, including nuclear, coal, natural gas, and renewable sources such as wind and solar.

Southern Company is another major utilities company that provides electric and gas services to customers in the southeastern United States. Southern Company owns a diverse portfolio of power generation assets and is one of the largest producers of electricity in the United States.

American Electric Power is a leading electric utility company that serves millions of customers in the United States. American Electric Power owns and operates a diverse range of power generation assets and is also involved in transmission and distribution.

NextEra Energy is a clean energy company that is one of the largest producers of renewable energy in the world. NextEra Energy owns and operates a diverse portfolio of power generation assets, including wind, solar, and natural gas, and is committed to transitioning to a low-carbon future.

Overall, the utilities sector is an important industry that plays a vital role in providing essential services to households and businesses. These major companies are at the forefront of the industry and are known for their commitment to providing reliable and sustainable energy.

Technology Industry

Technology Sector

Technology Sector 2560 1280 Jonathan Poland

The technology sector includes companies involved in the development and production of technology products and services. These products and services can include software, hardware, semiconductors, and internet services. The performance of the technology sector can be influenced by a variety of factors, including advancements in technology, changes in consumer behavior, and shifts in global economic conditions.

Some of the major companies in the technology sector include Apple, Microsoft, Google, Amazon, and Facebook.

Apple is a multinational technology company that designs and manufactures a range of consumer electronics, including the iPhone, iPad, and Mac computer lines. Apple is known for its innovative products and has a strong brand presence around the world.

Microsoft is a leading technology company that produces and sells a wide range of software products, including the popular Windows operating system and the Office suite of productivity tools. Microsoft also offers cloud-based services and has a growing presence in the hardware market with its Surface line of laptops and tablets.

Google is a global technology company that specializes in internet-related services and products, including search, advertising, cloud computing, and hardware. Google’s Android operating system is the most popular mobile platform in the world.

Amazon is a multinational technology company that focuses on e-commerce, cloud computing, and artificial intelligence. Amazon is the world’s largest online retailer and also offers a range of other services, including the popular Amazon Web Services cloud platform.

Facebook is a social media and technology company that operates the world’s largest online social network. In addition to its flagship Facebook platform, the company also owns popular apps such as Instagram and WhatsApp.

Overall, the technology sector is a rapidly growing and highly dynamic industry that plays a critical role in driving innovation and shaping the way we live and work. These major companies are at the forefront of this industry and are known for their pioneering products and services.

Real Estate Sector

Real Estate Sector

Real Estate Sector 1920 1280 Jonathan Poland

The real estate sector includes companies involved in the ownership, development, and management of real estate properties. These properties can include residential homes, commercial buildings, and retail spaces, as well as specialized properties such as hospitals, hotels, and warehouses. The performance of the real estate sector can be influenced by a variety of factors, including economic conditions, population growth, and interest rates.

Some of the major companies in the real estate sector include Simon Property Group, Prologis, and Public Storage.

Simon Property Group is a leading global real estate company that owns and operates a diverse portfolio of retail properties, including malls, outlets, and mills. Simon Property Group is one of the largest real estate companies in the world and has a strong presence in the United States and Europe.

Prologis is a global real estate company that specializes in the development and management of industrial properties, including warehouses, distribution centers, and fulfillment centers. Prologis is one of the largest industrial real estate companies in the world and has a significant presence in North America, Europe, and Asia.

Public Storage is a real estate investment trust (REIT) that owns and operates a diverse portfolio of self-storage properties in the United States. Public Storage is one of the largest self-storage companies in the world and is known for its high-quality properties and convenient locations.

Overall, the real estate sector is a significant industry that plays a vital role in the global economy. These major companies are at the forefront of the industry and are known for their strong portfolios of properties and expertise in real estate development and management.

Industrials Sector

Industrials Sector

Industrials Sector 1920 1206 Jonathan Poland

The industrials sector is a category of stocks that includes companies involved in the manufacturing and production of goods, as well as providers of related services. Examples of companies in the industrials sector include aerospace and defense firms, such as Boeing and Lockheed Martin, industrial machinery companies like Caterpillar and Deere, and transportation companies like Union Pacific and FedEx. These companies are involved in a wide range of activities, including designing, building, and servicing industrial and commercial products.

The performance of the industrials sector can be influenced by a variety of factors, including global economic growth, technological innovations, and changes in consumer and business spending. Well-known companies in the industrials sector include General Electric, which is involved in a variety of industries including aviation, healthcare, and renewable energy, and Honeywell, a technology and manufacturing company that produces a range of products including aerospace systems and building controls.

  • Aerospace & Defense
  • Specialty Business Services
  • Consulting Services
  • Rental & Leasing Services
  • Security & Protection Services
  • Staffing & Employment Services
  • Conglomerates
  • Engineering & Construction
  • Infrastructure Operations
  • Building Products & Equipment
  • Farm & Heavy Construction Machinery
  • Industrial Distribution
  • Business Equipment & Supplies
  • Specialty Industrial Machinery
  • Metal Fabrication
  • Pollution & Treatment Controls
  • Tools & Accessories
  • Electrical Equipment & Parts
  • Airports & Air Services
  • Airlines
  • Railroads
  • Marine Shipping
  • Trucking
  • Integrated Freight & Logistics
  • Waste Management
Healthcare Sector

Healthcare Sector

Healthcare Sector 2520 1394 Jonathan Poland

The healthcare sector includes companies involved in the provision of medical products and services, such as pharmaceuticals, medical devices, and healthcare services. These companies play a crucial role in the global healthcare system by developing and distributing the products and services that are used to diagnose, treat, and prevent diseases. The performance of the healthcare sector can be influenced by a variety of factors, including advances in medical technology, changes in healthcare policy, and demographic trends. Some of the major companies in the healthcare sector include Johnson & Johnson, Pfizer, and UnitedHealth Group.

Johnson & Johnson is a leading healthcare company that produces a wide range of products and services for consumers, patients, and healthcare professionals. Johnson & Johnson operates in a number of different sectors, including pharmaceuticals, medical devices, and consumer health.

Pfizer is a global pharmaceutical company that discovers, develops, and manufactures a range of innovative medicines and vaccines. Pfizer’s products are used to treat a wide range of medical conditions and diseases, including cancer, cardiovascular disease, and infectious diseases.

UnitedHealth Group is a healthcare company that provides a range of services, including health insurance, healthcare providers, and healthcare information technology. UnitedHealth Group is one of the largest health insurance companies in the United States and serves millions of customers around the world.

Overall, the healthcare sector is a critical industry that plays a vital role in promoting health and wellbeing. These major companies are at the forefront of the industry and are known for their innovative products and services.

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