Barefoot Investor and Mike Kemp

• people who manage a company are CRUCIAL
• don’t just believe the stock price… be smarter so you can buy cheap stocks
• think independently from what you read in the press (knee jerk reactions)

Stock market mistakes

• economy: experts get it wrong all the time (seriously)

what to look for in companies

• stable history of earnings
• short payback period (7 to 10 years)
• don’t pay for potential future growth (too risky)

formulas… not that complicated

apply filters to pre-select the ASX businesses (profit in last 5 years, acceptable debt level, return on equity of 15% or more)

debt to equity (debt is very dangerous when things go wrong)

• 500 home / 300 mortgage = you own 200 (equity)… the ratio is 300/200 = 1.5
• a company should own more than it owes (simplistic but a good start) so look for ratio of 1 or less
• Kemp’s formula: (debt – cash) / (equity + brand value)

interest coverage

• how able is the company to pay its interest costs
• the higher the interest coverage the better (around 3 or higher)
• EBIT / Net interest expense

return on equity

• net profit / equity of shareholders… should be 15% or higher (rule of thumb)

STUDY THE BUSINESS (100 hours)