One Up on Wall Street

Cash flow is a good indicator of company’s prosperity. An increasing cash flow from year to year is an indicator of an improving company.
Long-term debt reduction is another sign of prosperity. Compare long-term debt over the years and if it is reducing, that’s a good sign.
Cash exceeding debt it is very favourable. A company cannot go bankrupt if it has more cash than debt.
One quick way of determining the financial strength of a company is to take their assets (inventories, receivables, plant, equipment) and see how it is financed. If there’s enough cash to finance short term debt you don’t have to worry about the short term.
The bottom line, profit after taxes.

A small company with few products that has one which does well means more than a large company with many products that has one do well. Small companies have big moves, big companies have small moves (in stock price).
Inventory build up is usually a bad sign, it can mean inventory is not being sold.
LIFO - last in first out. Gold is bought at $40 an oz 30 years ago, and some is bought at $400 recently. Last in first out means that if we sell an oz of Gold today at $450 we earn $50.
FIFO - First in first out. As above if we sold Gold for $450 we would earn $410 because we count the Gold we bought 30 years ago.

Long-term Growth Rate + divident yield / Price to Earnings

Book value may pay little resemblance to the actual worth of a company. Book value can be high on a bankrupt company.
The book value may be priced at 400 million, but may only get 200 million in a bankruptcy sale, it is not a good measure of anything.
You have to have a good understanding of a company’s assets to properly appreciate book value. e.g. a bunch of tunnels, train tracks and rail cars may have a big book value but be worthless in reality.
The opposite can be true of book value. Mining companies, for example, carry their land / natural resources as a book value at a fraction of their potential.

Cash flow is the money a company earns as a result of their business.
All companies earn cash, some have to spend more for each dollar earned.
A $20 stock with a $2 cash flow has a 10-1 ratio which is ‘standard’. This is a 10% return on each stock you own.
Free cash flow is the important measure. It’s cash that is earned and does not have to be spent.
With $10 in cash per share the price is unlikely to drop lower than $10 per share.

If insiders are buying, or the company itself is buying stocks, it is a good sign.
The company has been able to replicate its success in one location or products into others.
Small companies that are already profitable and have proven their concept can be replicated.
A good company that is boring, uninteresting and hasn’t been discovered by big investors yet.
The fundamentals are up and the price is down.

If you know why you bought a stock you will have an idea if you need to sell that stock if those conditions no longer exist.
Inventories are building up and the company cannot get rid of them. They will have to drop prices.
The company stops building new stores / expanding and there are other worrying signs about their business in general, like they don’t stock acid wash denim.

If a stock you’ve bought goes down, and you’re waiting for it to go back to the price you bought it at to sell, you may be waiting a long time. Take the loss. This is assuming the fundamentals do not improve.
Stock prices can move in the opposite direction to fundamentals, but over the long term price follows fundamentals.
People who are impatient with slow growers and want to get-rich-quick often opt for getting poor quicker.
Just because a stock goes up doesn’t mean you were right to buy it.
It is better to buy a good company that is already doing well (i.e. Google) than try to pick the next good company.
A lousy cheap stock is just as bad as a lousy expensive one.