Free Cash Flow: The True Measure of Value
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Free Cash Flow: The True Measure of Value

What is Free Cash Flow? Free cash flow (FCF) is what Warren Buffett calls “owner earnings”. It is the amount of cash a company has left over after taking care of capital expenditures (CapEx) and working capital needs. Why Care About Free Cash Flow? Positive and growing free cash flow over a range of the…

Net Margin: a Measure of Accounting Profitability
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Net Margin: a Measure of Accounting Profitability

Net margin, also called net profit margin, is a measure of a company’s accounting profitability, i.e. profits reported on the income statement. Net margin compares a company’s net earnings, or net income, to its revenues or sales. How to Calculate Net Margin To calculate a company’s net margin, divide net earnings by sales. For example, Microsoft reported 2021 net earnings of $61.3…

How to Calculate Compound Annual Growth Rate (CAGR)

How to Calculate Compound Annual Growth Rate (CAGR)

The compound annual growth rate, or CAGR, is the average annual growth rate for any value or amount that grows over time, such as the rate of return of a stock or entire portfolio, factoring in reinvestment and therefore compounding. CAGR is a widely accepted way of smoothing out investment returns which allows comparing the performances of different…

DuPont Analysis: Dissecting Return on Equity
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DuPont Analysis: Dissecting Return on Equity

DuPont analysis describes a process which breaks down a company’s return on equity (ROE) into individual components. DuPont analysis is especially useful to assess the underlying reasons for changes in a company’s ROE over time, and to compare these changes to competitors. Note that while this blog post describes three-stage DuPont analysis, five-stage DuPont analysis exists…

Return on Equity (ROE): A Measure of Company Profitability
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Return on Equity (ROE): A Measure of Company Profitability

Return on equity (ROE) is a measure of a company’s profitability, and one of Warren Buffett’s key criteria when looking for strong companies to invest in. ROE shows us how much money a company can generate with the money invested by its shareholders, i.e. shareholders’ equity. Since shareholders’ equity consists in part of retained earnings, which is the…