# Are these good steps to find a good business?



## RandomInvestor (11 October 2016)

Hey there guys so I wanted to make my self steps that I follow for investing. These are my steps (please any feedback/suggestions to improve is greatly appreciated)

I also have some guidelines/rules that I want to follow and only invest in businesses that meet that criteria.

1. Choose a random business listed on the public stock exchange.

2. Go on the company's website and find out as much as the possible so I know the company what it does its operations its products etc, well enough so when someone asks me for example "what does Mcdonalds do" I can give them a strong straight forward answer.

3. Read every annual report from when the company started to the date today.

4. Read every financial statement such as , Income, balance, cash flow statements. And determine health of company based on certain figures. 

5. Haven't achieved yet which is IF the business is solid and has potential to grow is to find the intrinsic value formula for the business, but this has long to go I believe.


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## luutzu (11 October 2016)

RandomInvestor said:


> Hey there guys so I wanted to make my self steps that I follow for investing. These are my steps (please any feedback/suggestions to improve is greatly appreciated)
> 
> I also have some guidelines/rules that I want to follow and only invest in businesses that meet that criteria.
> 
> ...




Don't chose a random business, choose one whose business (and size and operations) are simple enough that you could understand it.

You don't really need to read every financial statement or annual report in detail at first. Unless you want to for educational purposes, then sure. But I would just look at a few key figures and ratios... then if it look like it's a good business, then proceed to do a more detailed financials.

So if the company doesn't make any money for years; or appear high quality stuff but its price seems too high... poor business you can just ignore; good ones but high price now maybe leave til later... the fairly good company at reasonable or seemingly cheap price you can start to take a much closer look.

For detailed studies of established and great businesses, or failed ones, that you want to study to learn from... then pick those directly. Not randomly going through the entire market.


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## Tightwad (11 October 2016)

it would be more efficient to use a scan on a site to turn up companies, based on low debt, roe etc.


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## galumay (11 October 2016)

Tightwad said:


> it would be more efficient to use a scan on a site to turn up companies, based on low debt, roe etc.




Indeed, and the idea of reading every AR of a company for the last 10 years fills me with dread!


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## RandomInvestor (11 October 2016)

luutzu said:


> Don't chose a random business, choose one whose business (and size and operations) are simple enough that you could understand it.
> 
> You don't really need to read every financial statement or annual report in detail at first. Unless you want to for educational purposes, then sure. But I would just look at a few key figures and ratios... then if it look like it's a good business, then proceed to do a more detailed financials.
> 
> ...




When I say random I don't say buy random I mean inspect random business like choose one for example of the asx 200.


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## RandomInvestor (11 October 2016)

Tightwad said:


> it would be more efficient to use a scan on a site to turn up companies, based on low debt, roe etc.




Yeah that's my criteria which I haven't mentioned. I am looking for companies little to no debt, high rates of return on equity and on assets, high cash flow, assets and least double of liabilities.


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## systematic (11 October 2016)

RandomInvestor said:


> Yeah that's my criteria which I haven't mentioned. I am looking for companies little to no debt, high rates of return on equity and on assets, high cash flow, assets and least double of liabilities.




Sorry; could you clarify that criteria?


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## RandomInvestor (11 October 2016)

systematic said:


> Sorry; could you clarify that criteria?




What do you mean? What I said doesn't make sense or?


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## systematic (11 October 2016)

RandomInvestor said:


> What do you mean? What I said doesn't make sense or?



...yes (just a bit of clarifying)



RandomInvestor said:


> I am looking for companies little to no debt, high rates of return on equity and on assets



...this bit is okay



RandomInvestor said:


> high cash flow



...in relation to what?



RandomInvestor said:


> assets and least double of liabilities.



...I don't understand this


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## Smurf1976 (11 October 2016)

An easier way to that approach would be to first screen the entire ASX for stocks which meet your financial criteria.

For example, you might want (picking random things here just for example and not a recommendation) to find only those stocks which:

Pay dividends at a rate exceeding x% return per annum

Have a P/E under whatever amount

Have a trend of increasing earnings over the past x years

Those are just random examples but my point is that if you were to screen the entire market first, coming up with only those stocks which meet your specific criteria, then that's (1) going to avoid wasting time looking at stocks which upon manual investigation don't meet your criteria and (2) will turn up companies that you've never even heard of but which are actually pretty decent businesses albeit not well known ones.

Using that approach I've had 100%+ capital gains, plus dividends, on a number of stocks that I'd never heard of previously and in industries I hadn't really thought much about. One owns theme parks and other things of that nature, another is a travel agent, another is an oil company but they don't sell fuel to the public so aren't a well known name, another owns hotels, another makes and sells things to heavy industry and mining but isn't itself in the mining business as such. All companies that aren't well known "household" names and which I knew nothing about until they came up based on screening for financials and went from there with further research into what turned out to be pretty decent investments. 

If you're wanting to invest (or avoid) specific industries then always do proper research and never assume what the company does even if it's a well known one. There's plenty of surprises there in terms of what businesses actually do and that's true even with fairly well known ones.


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## So_Cynical (11 October 2016)

RandomInvestor said:


> 1. Choose a random business listed on the public stock exchange.




This is a good exercise, i would start with very small company's, MC less than 80m as these business tend to be straight forward and easy to understand, i often just flick through random stocks looking for something that stands out.


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## RandomInvestor (11 October 2016)

systematic said:


> ...yes (just a bit of clarifying)
> 
> 
> ...this bit is okay
> ...





Oh I see, I didn't think about the relation I just mean't cash flow in trouble, but now that you said it I guess cash flow in relation to the  capital expeditures and total debt.


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## RandomInvestor (11 October 2016)

Smurf1976 said:


> An easier way to that approach would be to first screen the entire ASX for stocks which meet your financial criteria.
> 
> For example, you might want (picking random things here just for example and not a recommendation) to find only those stocks which:
> 
> ...




Thanks smurf didn't even know about that thanks.


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## systematic (11 October 2016)

RandomInvestor said:


> Oh I see, I didn't think about the relation I just mean't cash flow in trouble, but now that you said it I guess cash flow in relation to the  capital expeditures and total debt.



...Ok



RandomInvestor said:


> assets and least double of liabilities.




...what does that mean?  I think you've got a typo or something?  Current ratio?


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## luutzu (11 October 2016)

RandomInvestor said:


> When I say random I don't say buy random I mean inspect random business like choose one for example of the asx 200.




Yea, I know what you meant. Just what I'd do is not pick a random company to analyse either.

If your work or life experience suggest that businesses in a certain sector would be more interesting or easier for you to start with... then start with companies in that sector/industry. So companies in, say, banks or insurance, where you're not familiar with, do that later as you expand and got more familiar with other aspects of business analysis.

Can't study all things at once... so the first hurdle would likely be the financial statements. Might not be a good idea to learn both financial interpretation as well as a completely unfamiliar business.

ANyway, just my opinion on what I do... 

----

Regarding filtering for financial ratios as others have suggested. It's a good idea but what I found is you'd only want to use that prefiltering approach when you could invest in anything. But financial ratio filters alone could mean you might miss a great business that by mathematical roundings, did not hit your criteria and so you miss out completely.

Say, a great up and coming company that has only started to earn its profits after years of investment. Put in any sensible financial filters and you're definitely going to miss that kind of rare find. And it is rare so might not be worth the troubles to scour the entire market in hope of finding one when you're starting to get to know the market.

A good example of what I'm talking about would be Anaeco. 
It's been a big loser, literally makes no money for 16 years and about to go bankrupt only 2 months ago. 

It doesn't fit any financial metrics indicating a potential game changer for the portfolio... but if you read its business history and follow its development; it's worth a great deal of interest to any investor. Don't want to speak too soon but what I almost gave up for dead is changing my entire portfolio.

Anyway, depends on how we approach investing. As business owners or as simple financial analysts. For what it's worth, a good investor got to know how to use both business and financial ratio sensibly.


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## RandomInvestor (11 October 2016)

systematic said:


> ...Ok
> 
> 
> 
> ...what does that mean?  I think you've got a typo or something?  Current ratio?




Well I was reading that assets that are higher than liabilities is better. I guess cause more assets than debt, liabilities is debt pretty much right?


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## RandomInvestor (11 October 2016)

luutzu said:


> Yea, I know what you meant. Just what I'd do is not pick a random company to analyse either.
> 
> If your work or life experience suggest that businesses in a certain sector would be more interesting or easier for you to start with... then start with companies in that sector/industry. So companies in, say, banks or insurance, where you're not familiar with, do that later as you expand and got more familiar with other aspects of business analysis.
> 
> ...




Ok thanks, I had a important question that's always on my mind I never saw the point of ratios like debt to equity ratio is total liabilities divided by stock holder equity. But I could of sworn that is was total assets - total liabilities anyways, couldn't I just look at total liabilities  and stock holder equity seperatly? I don't see the difference.


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## systematic (12 October 2016)

RandomInvestor said:


> Ok thanks, I had a important question that's always on my mind I never saw the point of ratios like debt to equity ratio is total liabilities divided by stock holder equity. But I could of sworn that is was total assets - total liabilities anyways, couldn't I just look at total liabilities  and stock holder equity seperatly? I don't see the difference.




Was starting to reply, but here - read this, it does a better job investopedia

Also, it's not always total liabilities to equity.  As a few people have said recently, you need to learn the ratios to determine how _you_ want to use and define it.  For example, if I were to look at debt to equity, I might want to look at long-term debt to equity.  I might not want current liabilities taken into account.


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## RandomInvestor (12 October 2016)

systematic said:


> Was starting to reply, but here - read this, it does a better job investopedia
> 
> Also, it's not always total liabilities to equity.  As a few people have said recently, you need to learn the ratios to determine how _you_ want to use and define it.  For example, if I were to look at debt to equity, I might want to look at long-term debt to equity.  I might not want current liabilities taken into account.




Ah ok but coudln't you just look at total liabilities to look at the long term? Also I don't see the relation for the d/e ratio the stock holders equity part, what does the money that the stock investors put into the business matter for debt? Or is it an indicator how much debt is been stacking up compared to how much money poured in? If that's the case wouldn't we just use return on equity?


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## galumay (12 October 2016)

Part of the answer is that different types of businesses need different approaches for analysis and different metrics become more or less relevant. Sometimes you may choose a metric to concentrate on for comparison of businesses in the same sector, but if you are comparing companies in different sectors you may choose a different metric.

IMO good analysis and research skills can't be developed just by understanding and choosing a set of metrics or formulas to enter data into. Its also something that doesnt have a defined endpoint - as in if you learn a, b & c you will be a successful and good investor. I believe its a constant learning, the more you read and discuss the more you learn, every company you research and analyse adds to your understanding of the process, and finally every investment you make can end up teaching you more about the process, learning how and why, what happened.

I also run a decision journal to record all my research, deliberations, and actions with predictions for the outcomes. Then I revise it regularly and reflect on my initial decision, the process that led to it and the outcomes and reasons for the outcomes. 

Its interesting to see the number of decisions that turned out well, not because of my research and analytical skills, but due to pure luck! Its also sobering to re-visit the decisions that had poor outcomes and be honest about the reasons! Like much in life its easy to fall into the trap my dear old Dad used to describe this way, "Son, there are only two outcomes in life, good management and bad luck."


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## Klogg (12 October 2016)

RandomInvestor said:


> Ah ok but coudln't you just look at total liabilities to look at the long term? Also I don't see the relation for the d/e ratio the stock holders equity part, what does the money that the stock investors put into the business matter for debt? Or is it an indicator how much debt is been stacking up compared to how much money poured in? If that's the case wouldn't we just use return on equity?




Unfortunately, even just picking out the on balance sheet liabilities you decide to take into account (although systematic's post is still definitely a good one).

You also have to consider things like operating leases or capital expenditure that the company has committed to. Sure, it may not be a liability on the books, but there will still be cash going out the door.
Whilst you may not include it in your debt to equity ratios, it doesn't make them any less important.




> Its interesting to see the number of decisions that turned out well, not because of my research and analytical skills, but *due to pure luck*! Its also sobering to re-visit the decisions that had poor outcomes and be honest about the reasons! Like much in life its easy to fall into the trap my dear old Dad used to describe this way, "Son, there are only two outcomes in life, good management and bad luck."




I've had my fair share of this recently. Great thing to keep in mind.


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## systematic (12 October 2016)

RandomInvestor said:


> Also I don't see the relation for the d/e ratio the stock holders equity part, what does the money that the stock investors put into the business matter for debt? Or is it an indicator how much debt is been stacking up compared to how much money poured in? If that's the case wouldn't we just use return on equity?




...My best quick answer (all I can do right now) to what you're asking there (i.e. why does the 'd' relate to the 'e' in the ratio)...it's about leverage.  Think of it the same as how much debt to the equity you have in your home.
If you have $500k equity and a $500k mortgage, you are less levered than if you had, say, $100k equity and a $900k mortgage.

I'm not suggesting whether or not it is an important ratio, by the way, just trying to help you understand it.  It's certainly a common ratio.

Cheers
Steve


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## craft (12 October 2016)

galumay said:


> "Son, there are only two outcomes in life, good management and bad luck."




Absolute classic


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## luutzu (12 October 2016)

RandomInvestor said:


> Ok thanks, I had a important question that's always on my mind I never saw the point of ratios like debt to equity ratio is total liabilities divided by stock holder equity. But I could of sworn that is was total assets - total liabilities anyways, couldn't I just look at total liabilities  and stock holder equity seperatly? I don't see the difference.




Different people, and different vendors, may define these debt and leverage ratio differently. Here's how I understand it.

Debt I define as the interest-bearing loans and borrowings the company owe - to banks and lenders who will charge interest.

Liabilities, such as payables the company owe for goods received etc., that's technically also a debt, or a liability... but they're free money so depends on other factors, it's not much of a problem if the company can delay those payment... they get to use leverage for free.

So you got to separate what debt to equity ratio mean... 


But in general, if debt is taken as both the loans and the non-interest component, divide by equity to get that ratio... it's a quick measure of the company's risk and ability to borrow.

Risk in terms of it owing too much to the banks and lenders, and any failed repayment mean bankruptcy. Borrowing capacity in that if the company have more equity than debt, they can generally go and refiance or finance/borrow to expand or when times are tough.

But if they have too much debt already, and the tough times come - either have to raise more equity, which dilutes existing shareholder value; or borrow at very high cost; or not able to borrow at all and go bankrupt.

The other risk is that to the lenders and the suppliers/employees etc.

If the company have high debt and liability, say too much payables... and there's very little equity in its balance sheet. The supplier and lenders will start to wonder why they are taking all the risk and not already own the business. So the company would either raise more equity to expand, safely still... or lenders will start to demand faster repayments or stop lending.

what's a safe and balanced ratio depends on the business and the industry; also depends on that liability or real interest bearing debt discussed. 

you don't want a business with a lazy balance sheet; don't want one with too much debt that any uptick in rates will eat a lot into the profit that you share in, or send the company bankrupt... 

So it depends. There are certain guidelines for different industry.



Accounting is just the beginning of understanding the business. You really got to really know the business to put the accounting numbers in context, else it can be quite misleading.


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## RandomInvestor (12 October 2016)

systematic said:


> ...My best quick answer (all I can do right now) to what you're asking there (i.e. why does the 'd' relate to the 'e' in the ratio)...it's about leverage.  Think of it the same as how much debt to the equity you have in your home.
> If you have $500k equity and a $500k mortgage, you are less levered than if you had, say, $100k equity and a $900k mortgage.
> 
> I'm not suggesting whether or not it is an important ratio, by the way, just trying to help you understand it.  It's certainly a common ratio.
> ...




Ah ok thanks.


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## RandomInvestor (12 October 2016)

luutzu said:


> Different people, and different vendors, may define these debt and leverage ratio differently. Here's how I understand it.
> 
> Debt I define as the interest-bearing loans and borrowings the company owe - to banks and lenders who will charge interest.
> 
> ...





lmao man I just realized the debt to equity ratio had the word "equity" in it omg I feel stupid haha. Like I knew it when I read but I didn't see the correlation I just might be on another planet lol.


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## systematic (12 October 2016)

RandomInvestor said:


> lmao man I just realized the debt to equity ratio had the word "equity" in it omg I feel stupid haha. Like I knew it when I read but I didn't see the correlation I just might be on another planet lol.




...Nope, you're just learning!


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## Value Collector (12 October 2016)

RandomInvestor said:


> 2. Go on the company's website and find out as much as the possible so I know the company what it does its operations its products etc, well enough so when someone asks me for example "what does Mcdonalds do" I can give them a strong straight forward answer.




What does Mcdonalds do?

The simple answer doesn't always give you a good insight into how a company will operate as a sound investment.

The average person in the street would not be able to answer that question


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## skc (12 October 2016)

Value Collector said:


> What does Mcdonalds do?
> 
> The simple answer doesn't always give you a good insight into how a company will operate as a sound investment.
> 
> The average person in the street would not be able to answer that question




They soon will.


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## RandomInvestor (12 October 2016)

galumay said:


> Part of the answer is that different types of businesses need different approaches for analysis and different metrics become more or less relevant. Sometimes you may choose a metric to concentrate on for comparison of businesses in the same sector, but if you are comparing companies in different sectors you may choose a different metric.
> 
> IMO good analysis and research skills can't be developed just by understanding and choosing a set of metrics or formulas to enter data into. Its also something that doesnt have a defined endpoint - as in if you learn a, b & c you will be a successful and good investor. I believe its a constant learning, the more you read and discuss the more you learn, every company you research and analyse adds to your understanding of the process, and finally every investment you make can end up teaching you more about the process, learning how and why, what happened.
> 
> ...




I LOVE that quote, it actually got me thinking, like I know that management is crucial to success of a business but got me thinking even more on the management side.


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## RandomInvestor (12 October 2016)

Value Collector said:


> What does Mcdonalds do?
> 
> The simple answer doesn't always give you a good insight into how a company will operate as a sound investment.
> 
> The average person in the street would not be able to answer that question




The reason I said that because Peter lynch once said if you can't describe what a business does in a minute or less you should not own that business. I believe other famous investors said this to.


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## luutzu (12 October 2016)

skc said:


> They soon will.





The book it's based on - Behind the Arches - is also a great read.


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## luutzu (12 October 2016)

RandomInvestor said:


> lmao man I just realized the debt to equity ratio had the word "equity" in it omg I feel stupid haha. Like I knew it when I read but I didn't see the correlation I just might be on another planet lol.




Accounting equation is Assets = Debt + Equity.

So whether you use debt/equity or debt/assets, it's basically the same thing. They just give you a different perspective. ie. debt as a percent/ratio of equity; or debt as a percent of total assets.


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## Value Collector (12 October 2016)

RandomInvestor said:


> The reason I said that because Peter lynch once said if you can't describe what a business does in a minute or less you should not own that business. I believe other famous investors said this to.




I am not saying you shouldn't understand the business, and be able to describe what it does, you definitely need to be able to do that.

What I am trying to get to is that the simple answer that most people go to eg "Mcdonalds sells hamburgers" doesn't really describe their business model well.

You have to be able to understand exactly how a business generates its revenues, where and how those revenues come about, their profit margins, their competitors, and when they make a profit what do they do with it, are they paying it out, buying back stock or growing the capital base etc etc.

Over time you will stare to get a good understanding of the different types of businesses out there.


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## Value Collector (12 October 2016)

luutzu said:


> The book it's based on - Behind the Arches - is also a great read.




Yes it is, I loved it. I recommend it.

I just watched the trailer to the movie, and Ray seems like a much bigger a hole in the movie, lol. I thought the book made him loveable.


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## Boggo (12 October 2016)

Smurf1976 said:


> *An easier way to that approach would be to first screen the entire ASX for stocks which meet your financial criteria.*
> 
> For example, you might want (picking random things here just for example and not a recommendation) to find only those stocks which:
> 
> ...




Where to start, that's the issue for most.
First thing is are you an investor who is willing to sit on a stock and hand it down to your kids after you collect the dividends along the way, or are you willing to buy into a company and hold it for a period of time and exit when either the fundamentals or the price changes. Both of those go hand in hand and probably 99% of people on here adopt the latter method but hate to be referred to as traders.

If you want to see an example of a Mum and Dad investment type stock then look at TLS, an ASX top 20 stock whose profit this year is the same as it was at this time ten years ago and the stock price is the same now as it was in March 1998 (factor in CPI and inflation since then !!)
Possibly a great stock to hand down to your kids after you have tied up your savings to collect the dividends.

That's one way to go.

Another way that I prefer while going back to smurf's post above (highlighted bit) is to screen the market but for stock price behaviour as that will in turn usually reveal changes, or potential changes to stock fundamentals.
You can buy fundamentals but only at the price that is going at any point in time and this where price behaviour is a barometer of both sentiment and fundamentals.

There is always a reason behind why the price of a stock will change. When I find stocks by scanning and then looking at chart price behaviour I may have a dozen candidates but only need two or three, how to decide is the issue.

I will run through an example of one that worked, not all of them do but if you can back up a price behaviour with some basic support information it will most likely make that stock stand out from the rest and lean the odds in your favour.

The stock I will use as an example is WHC, weekly chart below. I prefer weekly charts for three reasons, one is that it smooths out daily gyrations, two, if the new trend stays intact for a week then it may be significant and thirdly if it is just daily trade activity that has caused an overreaction during the week may also be evident in that weekly bar behaviour or in the opening day of the week that follows which is also where you would be considering an entry.

In the case of WHC, it pops up in a scan, looks like a new trend but it has done this twice on the way down and failed both times. Why should this time be different.

Scared to say it but lets have a very simple look at fundamental basics, what does WHC do and is there anything that could have an effect.

WHC produces coal, great, I can oppose the loonies and greenies in one hit. (loonies =  baristas with taxpayer funded degrees in arts, humanities and women's studies who are now experts on climate change and immigration)

Next, what is happening with coal, China cutting production by reducing production days from 360 to around 260 and coal price, on the way up, coming off a low with a valid reason.

Done, there is one candidate for Monday based on sufficient fundamental (no need to argue over how to calculate P/E ratios  )

Buy in on Monday, do a bit of a Google on coal prices during the week (whaaaat- $100 per ton by Xmas - Yay  ).
http://www.indexmundi.com/commodities/?commodity=coal-australian&currency=aud

That is one way of doing it, not for everyone but after many years I always end up back with the KISS principle.

That's my 
This is not intended as a TA vs FA argument starter, just a way of showing that it can be kept simple.
My history indicates that it only works about 48% of the time but still gives a win/loss of about 2.8/1.0.
The profit is in the exit plan when I get it wrong.

Another way of achieving an outcome is to calculate all of these items that are in a fundamental analysis spreadsheet I was sent, I tried using it twice only !!...

P/E: Price/Earnings
ROA: Return on Assets
ROE: Return on Equity
EPS: Earnings per Share
YIELD: Dividend Yield
CATAI: Current Assets to Total Tangible Assets
CBTA: Cash Balance to Total Assets
CBTL: Cash Balance to Total Liabilities
CLTL: Current Liabilities to Total Liabilities
CTCCL: Change in Total Cash Flow to Current Liabilities
OCFTAI: Operating Cash Flow to Total Tangible Assets
OCFCL: Operating Cash Flow to Current Liabilities
PDACL: Profit before Depreciation and Amortisation to Current Liabilities
QACA: Quick Assets to Current Assets
QLCL: Quick Liabilities to Current Liabilities
RPTAI: Retained Profits to Total Tangible Assets
TLTAI: Total Liabilities to Total Tangible Assets

(My WHC screener scan response chart - click to expand)


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## RandomInvestor (12 October 2016)

luutzu said:


> Accounting equation is Assets = Debt + Equity.
> 
> So whether you use debt/equity or debt/assets, it's basically the same thing. They just give you a different perspective. ie. debt as a percent/ratio of equity; or debt as a percent of total assets.




Ah ok. But I don't see how the amount of assets is equal to the Debt + Equity. I don't see the correlation?


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## RandomInvestor (12 October 2016)

Value Collector said:


> I am not saying you shouldn't understand the business, and be able to describe what it does, you definitely need to be able to do that.
> 
> What I am trying to get to is that the simple answer that most people go to eg "Mcdonalds sells hamburgers" doesn't really describe their business model well.
> 
> ...




Ah ok thanks mate.


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## RandomInvestor (12 October 2016)

It's probably worth mentioning I seem to have a problem either grasping concepts or I over think it, I believe its a combination of both, because I feel like I only truly understand something when I go "Ohh I see" or "Ohh I get it" that's pretty much my response everytime I understand something that was a difficult. But I think I saw what the d/e ratio is useful for I think. so if the d/e ratio of company is 5 that means that the company has 5 dollars of debt of every 1 dollar of equity.


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## luutzu (12 October 2016)

RandomInvestor said:


> Ah ok. But I don't see how the amount of assets is equal to the Debt + Equity. I don't see the correlation?




A company's assets are resources that it control. Resources comprised of what the owner/s put in (equity), and what lenders and suppliers etc., loaned or yet to receive. Hence, A = L + E.

So when you do these debt/equity ratio etc., you have to  interpret it in the context of the business and its financial performance. So you'd want a company that can somehow use other people's money for cheap, or for free; but don't want to be in it if business condition deteriorate those debt aren't cheap and aren't free and you go bankrupt.

Remember you're investing in a business, not investing in some historical numbers or forecasts that will hit the dots as predicted.

It's safer to go for companies with strong barriers and established pposition - all because these kind of corp. tend to be able to keep doing what it has been doing without much trouble as far as you can see. It shouldn't mean you buy big blue thinking the world it operates in will be like it had so it's safe.

Reverse that and if you understand a business enough, feel confident about its future enough... its current financials can pretty much be ignored. Risky, but so are buying big and hold thinking there's no risk.


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## RandomInvestor (12 October 2016)

luutzu said:


> A company's assets are resources that it control. Resources comprised of what the owner/s put in (equity), and what lenders and suppliers etc., loaned or yet to receive. Hence, A = L + E.
> 
> So when you do these debt/equity ratio etc., you have to  interpret it in the context of the business and its financial performance. So you'd want a company that can somehow use other people's money for cheap, or for free; but don't want to be in it if business condition deteriorate those debt aren't cheap and aren't free and you go bankrupt.
> 
> ...




OMG THANK YOU SO MUCH I SEE WHAT I WAS MISSING! The "equity" I thought it referred to share holders that invested in the business, not the owners. Everything is clear as a blue sky now.


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## Value Collector (12 October 2016)

RandomInvestor said:


> OMG THANK YOU SO MUCH I SEE WHAT I WAS MISSING! The "equity" I thought it referred to share holders that invested in the business, not the owners. Everything is clear as a blue sky now.




The share holders are the owners.

Think of it like a house, if you bought a $500k house but to do it you borrowed $400k from the bank, then you have $100k equity we can call you an owner/shareholder/equity holder and the bank has $400k ownership in the form of debt we can call them debt holders/ bond holders etc

When you buy shares in a company, you are buying some of the equity and becoming an owner.


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## RandomInvestor (13 October 2016)

Value Collector said:


> The share holders are the owners.
> 
> Think of it like a house, if you bought a $500k house but to do it you borrowed $400k from the bank, then you have $100k equity we can call you an owner/shareholder/equity holder and the bank has $400k ownership in the form of debt we can call them debt holders/ bond holders etc
> 
> When you buy shares in a company, you are buying some of the equity and becoming an owner.




The whole equity thing always confused me, not sure what it mean't by you own equity in a business, on a house isn't equity the capital appreciation that you get each year and isn't it your own money?

So in the d/e ratio the "equity" refers to company owner, share holders, or anyone who has invested in the business?


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## Value Collector (13 October 2016)

RandomInvestor said:


> The whole equity thing always confused me, not sure what it mean't by you own equity in a business, on a house isn't equity the capital appreciation that you get each year and isn't it your own money?
> 
> So in the d/e ratio the "equity" refers to company owner, share holders, or anyone who has invested in the business?




The equity is the part of the business or houses capital value that is owned by the owners/ shareholders (owners and shareholders are the same thing)

For example if you owned a $500k house but owed $500k on it, you have zero equity, because if you sold it you would have to give the whole $500k to the bank to pay off the loan.

But if you only owed $400k to the bank, you would have $100k equity, because if you sold it and paid he bank back you would have $100k left, that $100k is your equity.

If the house was only worth $400k but you owed $500k you would have negative equity, meaning you owe the. And more than what the asset is worth.

You can build equity in a few ways, you could put more of your own money in at the start, you could use the earnings of the asset to pay off the loans, or the asset could go up in value.


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## luutzu (13 October 2016)

Value Collector said:


> The share holders are the owners.
> 
> Think of it like a house, if you bought a $500k house but to do it you borrowed $400k from the bank, then you have $100k equity we can call you an owner/shareholder/equity holder and the bank has $400k ownership in the form of debt we can call them debt holders/ bond holders etc
> 
> When you buy shares in a company, you are buying some of the equity and becoming an owner.




I that $500k house next to a toxic dump or what?


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## Value Collector (13 October 2016)

RandomInvestor said:


> The whole equity thing always confused me, ?





This video might clear some things up for you.





luutzu said:


> I that $500k house next to a toxic dump or what?




It's next to your mum's house.

Juss Kidding


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## luutzu (13 October 2016)

Value Collector said:


> This video might clear some things up for you.
> 
> 
> 
> ...





So it's the one behind us. 

That explains why I have this super ability to be a pain in the behind. Dad's bonsai and plants attracts (breed?) mosquitos; they became toxic and I was bitten quite frequently. Dam, should've let those spiders bit me instead.


Have a HS friend who has great talent with that "your momma" joke. The guy could go on for quite a while with it.


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## Klogg (13 October 2016)

Value Collector said:


> This video might clear some things up for you.
> 
> 
> 
> ...





I would have thought it more appropriate if he used a drug company in the example....


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## andy777 (13 October 2016)

Klogg said:


> I would have thought it more appropriate if he used a drug company in the example....




herbalife or valeant?


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