Phase II (Financial Analysis)

“The way to make money is to buy when blood is running in the streets” – John D. Rockefeller.

Without a doubt, there is one financial characteristic of all successful corporations and small businesses: stable earnings. Financial analysis is a set of tools, methods, processes, and ratios to assess an organization’s viability, stability, and various profitability points along the matrix of time and production. Financial analysis provides the analyst with the confidence and security that a good financial model presents. This phase of the membership program on this site gets into the nuts and bolts of the company’s financial information. The goal is to identify an industry’s financial model and the three to five critical pieces of information a value investor will use to determine how the market will set a security’s price. With this information in hand, a value investor will then set an intrinsic buy and sell value price. In effect, a range of value the market will bear for a security given the financial results of this organization, the industry standards the company adheres to, and finally, the impact the overall economy has on this company’s value.

Over a course of more than 80 lessons and supporting research, a member of this site’s value investment club will gain the confidence necessary to build their financial model for an industry they select as their own. There are lots of examples and illustrations included to support each of the lessons. In addition, this section of the membership program includes supporting spreadsheets, schedules, and worksheets to assist the member with building their model.

Throughout this phase, a master example is provided tied to the hospitality sector of our economy, specifically hotel/motel lodging operations. This phase will build this industry pool and provide the reader with not only an excellent industry pool for the site’s value investment fund, but also for their personal use inside their fund.

This phase of the program is divided into seven sections. The following identifies each section and provides an introduction to the student about the respective section:

Concepts –
- Economy
- Industry Standards
- Financial Models
- Stable Growing Operations
Financial Statements
- Balance Sheet
- Income Statement
- Retained Earnings Statement
- Cash Flows
- Notes to Financial Statements
Ratios
Key Performance Indicators
Calculating Intrinsic Value
Calculating Buy/Sell Points
Building an Industry-Wide Model

Throughout these lessons, the student is introduced to the Hotel Industry and learns about that industry’s financial model. The key is to learn ‘What makes it tick?’ The result is a performance matrix along with a financial matrix that ultimately provides the secret of success. Lots of new terminology is introduced, including some peculiar terms only used in this industry. Each lesson builds on the prior lessons, and the result is an industry financial decision model with buy and sell points for all members of this particular pool. The members of this pool include:

Marriott Hotels
Hyatt Regency
Hilton Hotels
Wyndam Hotels
Choice Hotels
Intercontinental Hotels and Resorts

The primary business purpose is the traditional overnight lodging and extended stays. Those entities that have a strong gaming component were excluded from this particular pool in order to keep and maintain a high level of consistency related to operations and reporting.

The lessons, tutorials, webinars, white papers, and spreadsheets on this site are designed to teach these four principles. In addition, this site has over 600 supporting articles that augment the lessons and the program. It is effectively the best resource center available to learn about and implement a personal value investment fund. The annual goal is to achieve 22% plus returns.

You must be a member of this site’s Value Investing Club to access the respective lessons in Phase II – Financial Analysis and Phase III – Sophisticated Investing. In addition, membership entitles access to the respective investment pools and their associated financial models, along with emails of actual transactions for this site’s Value Investment Fund. To learn more, go to the Membership Page.

Industry Principles and Standards (Lesson 25)
Shifting from economic wide factors that impact market price to industry wide standards is essential with understanding and creating decision models for investment with a pool of similar companies.
How to Read a Balance Sheet – Simple Format
Reading a balance sheet is instrumental in understanding the business’s financial position. This particular financial report is a snapshot of a moment in time.
How to Read a Balance Sheet – Equity Section (Simple Format)
The equity section of the balance sheet equals assets minus liabilities. Traditionally the equity section is referred to as the net worth of the company. If you were to dispose of all the assets through a sale and pay off liabilities, the money left over would be available for distribution to the shareholders. The shareholders basically ...
Gross, Operational and Net Profit (Differences)
The word ‘Profit’ is used loosely in the business world. Profit refers to the amount earned net of costs in a transaction. The key is defining a transaction.
Gross Domestic Product (Lesson 21)
Gross Domestic Product is defined as the total production for the country. It is measured by including all the dollars spent to purchase products/services from all the various sellers of goods.
Elasticity in Economics (Lesson 22)
One of the terms synonymous with the field of economics is ‘Elasticity’. The term refers to the change in either the demand or supply (the other terms synonymous with economics) curve when there is a change in the price.
Economies of Scale (Lesson 24)
Of the basic business principles, economies of scale has the greatest impact on profitability over any other business principle. As an enterprise’s investment is spread over higher volume the cost per unit of production decreases.
Economic Uncertainty (Lesson 23)
If you think of the economy as a train pulling a load on the track, you would base its near future position on its current and historical trend. It is unlikely its current speed will change; thus, we can predict its future position with some degree of confidence.
Definition of Contribution Margin
Contribution margin is a core business concept and is often used in cost accounting to identify the amount of financial contribution a sold product provides to the company. Simply put, contribution margin is the sales price less the direct costs (sometimes referred to as variable costs).
Current Liabilities Section of the Balance Sheet
The current liabilities section of the balance sheet identifies those amounts due to third parties within the current year. These include accounts payable, credit card accounts, accrued payroll, taxes, unearned revenue, deposits and those amounts due within one year related to debt instruments.