Quick Analysis Using G.E.T.

G.E.T. stands for Gross Profit Margin, Equity Bond Theory, and Total Long-Term Debt to Net Income Ratio. When looking for a potential investment, check these 3 ratios in the company's financial statements to see if it could be a company with a Durable Competitive Advantage.

 

Gross Profit Margin

The Gross Profit Margin is the ratio Gross Profit to Revenue in percent. It shows how much earnings power the company has. Gross Profit Margin must be greater than 40% or greater than 30% for undiscovered companies. More is better.

 

Company with a Durable Competitive Advantage:

 

Undiscovered Company:

 

Equity Bond Theory

Check if Warren Buffet's Equity Bond Theory is significantly greater than the Rate of Return of a bond. As a rule of thumb, a Rate of Return greater than 10% is fantastic.

 

Equity Bond Theory for a Taxable Bond:

 

Equity Bond Theory for a Tax-Free Municipal Bond:

 

Total Long-Term Debt to Net Income Ratio

A company in good fiscal shape should be able to pay their debt in approximately less than 4 years. The less debt the company has, the better. Use this ratio as a guide.

 

 

After analysis of GET do a further check of the company's financial statements to determine the company's Durable Competitive Advantage.

 

Example 1

Date: May 11, 2012
Company: IBM
Price/Share: $201.17
Gross Profit: $50.138 Billion
Revenue: $106.916 Billion
Market Capitalization: $232.05 Billion
Income Before Tax: $21.003 Billion
Total Long Term Debt: $22.857 Billion
Net Income: $15.855 Billion

 

Gross Profit Margin

 

 

IBM's Gross Profit Margin is 46.89%, thus the company has good earnings power.

 

Equity Bond Theory

 

 

As of May 2012, the Corporate Bond Weighted Average Interest Rate (CB Wtd Avg) is around 6.00%.

 

IBM's Rate of Return: 9.05%
CB Wtd Avg: 6.00%

 

At $201.17 per share IBM's Rate of Return is greater than the Average Corporate Bond Rate of 6.00%. Therefore, IBM could be a bargain at a price of $201.17 per share.

 

Total Long Term Debt to Net Income Ratio

 

 

IBM can pay their Total Long Term Debt in about 1.44 Years. This is an indication of a well run company.

 

Example 2

Date: April 2011
Company: Ford Motor Corporation
Price/Share: $15
Gross Profit: $20.158 Billion
Revenue: $128.954 Billion
Market Capitalization: $57.3 Billion
Income Before Tax: $7.149 Billion
Total Long Term Debt: $103.988 Billion
Net Income: $6.557 Billion

 

Gross Profit Margin

 

 

Ford's Gross Profit Margin is 15.63%, which is less than 40%. This means its earnings power is very low. A very low earnings power could be an indication of a company in a very price competitive industry.

 

Equity Bond Theory

 

 

As of April 2011, the Corporate Bond Weighted Average Interest Rate (CB Wtd Avg) is around 6.00%.

 

Ford's Rate of Return: 12.47%
CB Wtd Avg: 6.00%

 

At $15 per share Ford's Rate of Return is greater than the Average Corporate Bond Rate of 6.00%. Even though Ford is trading at a bargain price, there are other calculations that the investor should look at.

 

Total Long Term Debt to Net Income Ratio

 

 

It will take Ford 15.85 years to pay off their Long Term Debt. They are in an industry where car models change every several years so they need to upgrade their equipment and manufacturing plant often. Investing in a company whose product constantly change and uses debt to finance new equipment and manufacturing plant may not be a good idea.

 

My Financial Analysis of Stocks

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