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Yerra Capital

What data do you analyze?​

We analyze the SEC 10-K, 10-Q, and Insider Trading data. We download this data

whenever the SEC makes it available and do an analysis daily.

What else would you need to do on top of this data?​

This data only gives you the financials that Warren Buffett and Charlie Munger

look at. There are additional vectors such as analyzing management, moats and

other qualitative analysis that is up to you.

Can I get access to the 10-K and 10-Q data?​

Yes, it is available here.

What are the tenents?​

Tenets of the Warren Buffett Way

Business Tenets​

Is the business simple and understandable?

Does the business have a consistent operating history?

Does the business have favorable long-term prospects?

Management Tenets​

Is management rational?

Is management candid with its shareholders?

Does management resist the institutional imperative?

Financial Tenets​

Focus on return on equity, not earnings per share.

Calculate “owner earnings.”

Look for companies with high profit margins.

For every dollar retained, make sure the company has created at least one dollar of market value.

Market Tenets​

What is the value of the business?

Can the business be purchased at a significant discount to its value?

Equities

We invest in equities and dabble in commodities based on company moats through:

  • 7 Powers Framework
  • Financials focused on Free Cash Flow and ROIC
  • Understanding commodity and geopoliticial shifts

We optimize for two things Free Cash Flow and Return on Invested Capital. These two numbers affect every decision we make either internally with OpsZero or external investments we make. Focusing on Free Cash Flow has a couple benefits that other numbers don’t have. At the end of the day cash is king and that is where we need to value. We can increase and optimize Net Margin but that doesn’t result in cash increasing. So we focus on free cash flow. With cash flow generative investments we can take the output of the cash either through dividends or stock buybacks and increase the value of our holdings.

When analyzing a company our process is the following:

  1. What is the free cash flow change year over year.
  2. What is the return on invested capital?
  3. How is the company reinvesting it’s cash flow?
  4. Investing it
  5. Debt repayment
  6. Stock buyback
  7. Dividends

We focus on buying and holding companies for the long haul to reduce our tax payments. However, we are pragmatic and opportunistic in the short term to buy and sell stock. So we should focus both on short term and long term. The best way to do this is likely to buy when things are low and sell when things are high.

Financials​

The financial metrics of Return on Invested Capital, Free Cash Flow, Debt to Equity, and Effective Tax Rate drive nearly all decisions we make.

  • Do you have a lot of debt?
  • Can you pay off your debt immediately if you need to?
  • Is your debt working for you?
  • How are your Financial Ratios?
  • Free Cash Flow? (Cash from Operating Activities – Cash Invested in Capital Equipment)
  • Days Sales Outstanding – How long does it take your customers to pay their bills?
  • Quick Ratio – Ensure that we are not running out of cash and are growing at a steady rate. (Current Assets /
  • Gross Profit Margin – How can we reduce the cost of delivering our services?
  • Net Profit Margin – How can we increase the revenue while reducing the cost of getting additional revenue?
  • Debt to Equity – We want to use financing to grow our business but we shouldn’t be over leveraged?
  • Cash Conversion Cycle. How long do we have to convert outflow to inflow to have working capital?

Free Cash Flow​

Growth in earnings implies that we are expanding our capabilities and growing the organization organically. Look at Price to Free Cash Flow

Cash Conversion Cycle​

“The cash conversion cycle (CCC) is a metric that expresses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales. Also called the net operating cycle or simply cash cycle, CCC attempts to measure how long each net input dollar is tied up in the production and sales process before it gets converted into cash received.”

Free Cash Flow should be augmented with the Cash Conversion Cycle. It should be consistently decreasing over time. A Cash Conversion Cycle represents the amount of days it takes to convert inventory and sales into cash. If possible making this negative has the best benefit because it means you get the cash first before you pay for the goods.

  • Pay Down Debt
  • Pay Dividend
  • Stock Buybacks
  • Invest in Growth

What is the change in FCF? What is the FCF being used for?

def day_inventory_outstanding(average_inventory, cogs):
    '''
    average_inventory is the well inventory, but in a services business it can
    also be the uninvoiced time.
    '''
    return average_inventory / cogs / 360

def day_sale_outstanding(ending_accounts_receivable, annual_revenue):
    return ending_accounts_receivable / annual_revenue * 360

def day_payable_outstanding(ending_accounts_payable, cogs):
    return ending_accounts_payable / cogs / 360

def cash_conversion_cycle(average_inventory, cogs, ending_accounts_receivable, ending_accounts_payable, annual_revenue):
    return day_inventory_outstanding(average_inventory, cogs) + day_sale_outstanding(ending_accounts_receivable, annual_revenue) - day_payable_outstanding(ending_accounts_payable, cogs)

FREE_CASH_FLOW_MULTIPLE = 4
def is_acquire_price(share_price, free_cash_flow, total_number_of_shares):
    '''
    Buy at Less Than 4x Free Cash Flow
    '''
    return share_price < ((free_cash_flow * FREE_CASH_FLOW_MULTIPLE) / total_number_of_shares)

Return on Invested Capital​

Also referred to as Return on Capital. Return on Invested Capital is one of the best metrics to understand the health of a business. By focusing on ROIC we have a single number to understand if we are innovating and if those innovations are resulting in customers that are happy because they continue to purchase from us. Further, ROIC allows us to understand if we are allocating capital well. def return_on_invested_capital(net_income, debt, equity): return net_income / (debt + equity)

Debt to Equity​

Look at Earnings per Share and how it is changing over time. It should be > 0, if it is less than 0 then there is no equity and the company is overleveraged. Effective Tax Rate Reduce taxes so they can be reinvested into the business for further growth. def tax_rate(total_tax, taxable_income): return total_tax / taxable_income