Part 3 -Fundamentals Aren’t Just Numbers: They’re the Keys to Winning the Stock Game
A Look at the Metrics That Drive Company Share Prices Up (or Down)
A warm hello to all new readers! I’m glad you are on board.
New here? I’m Michael and the founder of TheValueVantage.com and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream. If you had invested along, you would have gained more than 50% in the past 12 months. Take a look at the Return-Simulator on my website. How it all started.
Understanding beats gambling.
The Balance Sheet & Cash Flow - Part 3
We've covered a lot of ground talking about what companies own. Now let's talk about what keeps CFOs up at night - debt, obligations, and whether the company is actually generating cash or just showing pretty black and white numbers on paper.
21. Deferred Revenue
You know how Netflix charges you for a whole year upfront? That's deferred revenue. The company has your money, but they still need to provide the service.
Why does this matter? Sure, it's nice to have cash upfront, but it's not "free money." I've seen too many companies crash because they spent tomorrow's revenue today. Just ask anyone who worked at MoviePass how that strategy ends.
22. Total Debt
Every company's favorite tool and biggest headache rolled into one. It's all the money they've borrowed, period.
Why does this matter? Debt isn't inherently bad - Apple has tons of it. But there's a world of difference between debt that's building an empire and debt that's keeping the lights on. When you're digging through a company's financials, always ask: "What's this debt doing for them?" Is it good or bad?
23. Accounts Payable
Money the company owes to others - suppliers, contractors, that one guy who fixed the office AC.
Why does this matter? This number tells you if a company is playing fair with its partners or stretching them thin to prop up its own cash flow. If it's constantly rising faster than revenue, something's probably wrong. It's like watching someone who keeps borrowing money to pay for lunch - eventually, the bill comes due.
24. Total Liabilities
Everything - and I mean everything - a company owes. From next month's rent to that massive loan they won't pay off until 2045.
Why does this matter? Everyone freaked out about WeWork's liabilities in 2019, but ignored Tesla's. Guess what? One of them figured out how to grow into their obligations, the other... well, you know how that story ended. The number itself doesn't tell you much - it's about whether the company can handle it without breaking its neck.
25. Non-Current Debt
The big loans that aren't due anytime soon. Think mortgages, not credit cards.
Why does this matter? This is where companies either build their future or dig their grave. Amazon used long-term debt to build warehouses everywhere. Toys"R"Us used it to fight a losing battle against the internet. Same tool, very different use and outcomes. Watch what they're doing with this money.
26. Shareholders' Equity
Take all the company's assets, subtract all the debts - that's shareholders' equity. Simple math that tells different stories.
Why does this matter? For banks, it's life or death - regulators demand healthy equity. For tech companies? Many successful ones burn through equity for years while growing like crazy. The number matters less than its context and how it compares to similar companies in the industry.
That's it for the balance sheet - the financial “time machine”. It shows what a company owns and owes at a specific moment.
But here's the thing: a snapshot can lie.
A company can look great on paper while bleeding cash, or seem debt-heavy while secretly printing money.
That's where the cash flow statement comes in. Forget accounting tricks and paper profits - this is about cold, hard cash.
How much comes in, how much goes out, and where it all ends up. The next fundamentals will show you if a company is actually making money or just playing accounting games.
Entering the Cashflow Statement
27. Free Cash Flow
The money that's actually left after paying for everything - including all that fancy new equipment and office expansions.
Why does this matter? This is the number that exposes all the accounting tricks. Enron looked profitable on paper but had horrible free cash flow. Same with WorldCom. And FTX. See a pattern? When a company shows great earnings but can't generate cash, start asking questions.
28. Issuance or Repayment of Debt
Are they borrowing more or paying it back? Simple as that.
Why does this matter? This tells you if a company is getting stronger or weaker over time. Microsoft has been paying down debt while cranking out profits. Compare that to companies that keep refinancing like it's a game of hot potato. One of these approaches tends to end badly.
29. Capital Expenditure (CapEx)
Money spent on big, long-term stuff. Think Intel building chip factories or Spotify buying podcast studios.
Why does this matter? This is where you see if a company is serious about growth or just trying to look pretty for quarterly reports. Netflix spends billions on content creation - that's their CapEx play. But watch out for companies that suddenly jack up spending when their core business starts slowing down. That's usually panic, not strategy.
30. Dividend Payments
Cash handed straight to you. This is the most direct way companies share profits.
Why does this matter? Young companies growing fast usually don't pay dividends - they need that cash to grow. That's fine. But when a mature company starts cutting dividends, it's like watching storm clouds gather. Just ask GE investors how much they missed those steady dividend checks.
What I did
I have decided to change the headline from Progress to What I did.
I finally pulled the trigger and made my first real money investment with TheValueVantage's Liberty Lift strategy. Now comes the fun part - letting it ride for 12 months while I can geek out on other stuff and write articles.
Speaking of geeking out, I've been diving deep into RTOS (Real-Time Operating Systems). Ever wonder how those tiny computers in your car make split-second decisions? That's RTOS magic at work. Unlike your laptop's operating system, which is basically juggling a thousand tasks and hoping nothing crashes, RTOS is like a precision timepiece. Every piece of code executes exactly when it should, no surprises. It's beautiful, really - imagine code running with the reliability of a Swiss watch. No bloat, no random Windows updates, just pure performance.
What's On My Mind
Life has its heavy moments. Next week, I'm heading back to my old company for a memorial event for a colleague and friend who meant a lot to me. Mixed feelings about it - there's the sadness, of course, but also looking forward to catching up with old colleagues and my former boss. Got a little speech prepared - hoping I can do justice to the memories we shared.
Nuggets
I’m still listening to Why Nations Fail. I now understand the hype about the book because it comes with countless great historical examples.
Take care,
Michael
Hit the heart if you love your nerdy moments :-D
Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.
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