Novice :: Need help in understanding few concepts from Pat Dorsey book

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Hello everyone,

I have been a silent reader/browser of this great investing forum so and this has definitively helped/helping me in sharpening up my investing skills. This is going to be my first post, so pls bear with me if this is too basic question or I am not posting at the right place.

I started my investment journey since 2013 but my investment thesis were not so sound and were more around momentum plays. This has costed me to some extent and forced me to think about building up an sound investment model.

As suggested by @Donald in one of the post on VP, I started reading “The Five Rules for Successful Stock Investing” and tried to capture the different component of investment process in a spreadsheet.

Brief about what spreadsheet does. There are 2 Tabs in it -
(a) Economic Moat - This tab calculates important parameters (Percentage of Free Cashflow to Sales, Net Margin as a percentage of Sales, Return on Assests and Return of Equity) for business evaluation as presented by Pat Dorsey in his book “The Five Rules for Successful Stock Investing”

(b) Consolidated - This has consolidated data of individual company from screener.in (assuming this data is correct)

For some reason, “Net Margin as a percentage of Sales” for even stronger companies are below the benchmarks as per “The Five Rules for Successful Stock Investing” book. For example, as per my calculations, for Stronger companies like Marico, “Net Margin as Percentage of Sales” are in the range of 7% to 13% while Pat Dorsey in his book talks about it should be more than 15%

I am confused if my calculations for Net Margin As percentage of Sales (Percentage of Net Profit/Sales) are incorrect or I am clearly missing something obvious.

I would appreciate if someone pls guide me on this.

Thanks
Marico.xlsx (26.6 KB)

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Did a quick look. Your Asset turnover calculation is incorrect. you have put the formula wrongly. It should be =+Consolidated!L3/((Consolidated!L22+Consolidated!K22)/2) or use
=+Consolidated!L3/AVERAGE(Consolidated!L22,Consolidated!K22)

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Thanks Saurabh. Very good catch indeed :slight_smile: . Changing the asset turnover formula impacted the ROA of the company for sure. But my question was more around Net Margin as a %age of Sales parameter. The way I have calculated it is as follows -

*Net Margin as a %age of Sales = (Net Profit/Sales)100

Is this calculation correct? If so, I am not sure why even the solid compounders like Mario, Asian Pains, Britannia has not been able to pass this benchmark on a consistent basis set by Pat Dorsey in his book “The Five Rules for Successful Stock Investing”

As per Pat Dorsey, the Net Margin as a %age of sales should be > 15% year after year (consistently for last 10 years). For some reason, some of the solid compounders I mentioned above fail to satisfy this criteria on a consistent basis.

My question is if my understating/calculation of this parameter is incorrect or the benchmark itself set by Pat Dorsey is too stringent ?

Thanks

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Good work Mr.Jameel, started reading the book now.
I am also in the same boat. Planning to screen and analyze companies on my own.

Will come back with my calculations soon.