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The purpose of looking at financial reports is to analyze the strengths and weaknesses of a listed company.#

Some tips for financial reports include analytical frameworks and useful tools. The purpose of looking at financial reports is to analyze the strengths and weaknesses of a listed company. There must be criteria for judgment, and these criteria are hidden in the financial reports.

"Balance Sheet," "Income Statement," and "Cash Flow Statement."

The "core indicators" in these three statements can directly reflect the strengths and weaknesses of a listed company.

Therefore, what you need to do when reading financial reports is to interpret the core indicators and produce qualitative conclusions.

Seventeen commonly used "core indicators" have been filtered from the financial data and categorized into five dimensions. A table has been created:

Focus on the "explanation and notes" for each indicator.

The ultimate goal of the five dimensions—cash flow, operational capability, profitability, financial structure, and debt repayment ability—is to clarify a company's situation regarding "assets, liabilities, and cash."

Assets are soft, liabilities are hard, and cash is king. This saying is worth reflecting on and applies equally to individuals.

4. How to use these indicators?

First, from the perspective of "a company," the levels of indicators can indicate strengths and weaknesses.

Simple indicators like gross profit margin, net profit margin, current ratio, and quick ratio are definitely better when higher.

However, the cash ratio and the equity ratio should be moderate.

If the cash ratio is too high, cash flow may be abundant, but cash cannot generate returns for shareholders.

If the equity ratio is too high, the company's leverage is too low, and operations may not be active enough.

Secondly, from the perspective of "an industry," compare different companies within the same industry horizontally. Companies in the same industry have similar business models, and comparing their gross profit margins, net profit margins, inventory turnover days, and accounts receivable turnover days can roughly indicate which companies are more outstanding.

When making investment decisions, in addition to looking at "financial indicators," one should also consider "valuation indicators."

This means comparing the PE, PB, and percentiles of different companies within the same industry. If a company's financial data is below the industry average, but its valuation indicators are higher than those of other companies, it is advisable to avoid it. Additionally, comparing the financial data of different companies within the same industry can help identify "fraudulent companies."

Every industry has one or several leading enterprises.

Leading companies possess rich management experience and strong channel control. Their gross profit, net profit, inventory turnover days, etc., generally represent the current ceiling of the industry. If a newly established company has better gross profit, net profit, and inventory turnover days than leading companies, then its financial data may be inflated.

Finally, if after analyzing several companies in an industry, the data looks poor—such as low gross profit, long business cycles, and negative OCF for several consecutive years—then the industry is likely facing problems.

First, be patient and observe. Is it meaningful to look at financial data right away? If you don't understand the business, looking at data is pointless. From top to bottom: Do you understand the current situation and basic rules of the industry the company is in? Broker research reports can help with this. Do you understand the company's main business? Broker research reports, the company's official website, and analytical articles can help with this.

Do you understand the changes in the company's business during the reporting period?

The "Management Discussion and Analysis" section in the financial report can help with this.

Second, look smartly. Financial data is never seen in the financial report because raw data is all numbers, and people are naturally insensitive to numbers. Therefore, tools should be used to view processed and visualized financial data. What tools can be used?

There are many, such as Xueqiu, Li Xingren, Luobo Investment Research, Choice, and financial report viewers, etc. They are quite similar; just use what you are comfortable with.

Third, look dialectically. Financial data is a language of finance, while understanding a company requires a business language, necessitating a mental connection between the two languages. How to do this? Deeply understand the business significance behind "key financial indicators":

The key points of looking at financial reports are understanding the business, using tools, and understanding indicators.#

Financial reports include three aspects: audit reports, accounting statements, and notes to the accounting statements. Here, we will focus on accounting statements, with the three core statements being:

Balance Sheet, Income Statement, Cash Flow Statement.#

To understand financial reports, the core is to understand these three statements.

1. Income Statement: See how much money a company has made.
   First, let's look at the income statement, which shows a company's profitability during a period. Two typical indicators can be examined:

Speed of making money—Operating Revenue, Net Profit

First, we can assess a company's growth speed from operating revenue and net profit. A simple method is to compare this year's operating revenue and net profit with last year's to see the growth rate. Taking Kweichow Moutai and Yanghe Brewery as examples, the data shows that Moutai has a much stronger growth capability than Yanghe.

Efficiency of making money—Gross Profit Margin
Additionally, we can see how efficient a company is at making money from the income statement. Simply put, it reflects whether the company can make a profit. This ability is generally measured by gross profit margin. What is gross profit margin?
Taking a restaurant as an example, if the operating revenue in 2016 was 100,000 and the operating cost was 50,000, then the gross profit is 100,000 - 50,000 = 50,000, and the gross profit margin is (100,000 - 50,000) ÷ 100,000 = 50%. This 50,000 still needs to be reduced by labor, utilities, and other expenses to determine the actual profit. Therefore, if the gross profit margin is too low, the restaurant may incur losses.
Generally, good companies have a gross profit margin of no less than 30%. Otherwise, after deducting taxes, management fees, and other expenses, the net profit may be minimal.
Similarly, let's calculate the gross profit margins of Kweichow Moutai and Yanghe Brewery.

2. Balance Sheet: Assess whether a company is safe.#

The balance sheet, as the name suggests, consists of two main parts: assets and liabilities.
Assets refer to things that a company owns that have commercial or exchange value and are expected to bring economic benefits or resources in the future. For example, cash, factories, machinery, etc., are typical assets;
Liabilities refer to debts that a company must repay in monetary terms, which will be settled with assets or services.
This statement primarily reflects a company's financial strength at a specific point in time. Here are two important pieces of information to introduce.

Debt-to-Asset Ratio#

Generally, reasonable corporate debt is aimed at better operating production and enhancing competitiveness. Reasonable borrowing is also a good choice for companies. However, having too much debt is always risky; if unable to repay, it could lead to bankruptcy. Therefore, companies with high debt levels are always dangerous.
How do we determine whether a company's debt is reasonable? The simplest method is the debt-to-asset ratio, which is total liabilities ÷ total assets.

Debt-to-Asset Ratio = Total Liabilities ÷ Total Assets
Generally, the debt-to-asset ratio varies significantly across industries. However, it is best not to exceed 50% and ideally not exceed 60%.
For example, both Moutai and Yanghe have debt-to-asset ratios around 30%, indicating a low debt burden.

In addition, we should also pay close attention to the overall borrowing rate of the company, which is the cost of debt. By focusing on interest expenses and other related sections in the financial report, we can find relevant information. The more a company can borrow at a low cost, the more valuable the debt becomes.

*Asset Turnover Ratio
Next, let's introduce an important reference indicator—the asset turnover ratio. This indicator can correspond to various specific asset turnover ratios, such as accounts receivable turnover ratio and inventory turnover ratio. The primary value of these turnover ratios is to reflect the efficiency of a company's operations.
Let's take the accounts receivable turnover ratio as an example.
The balance sheet has an item called accounts receivable, which refers to the money owed for goods sold but not yet received.

Accounts Receivable Turnover Ratio = Operating Revenue (from the income statement) ÷ Average Accounts Receivable.
How do we understand this indicator?

Assuming there is a regular customer who comes to your restaurant every month and eats for 100 yuan on credit, paying at the end of the month, this person spends a total of 1,200 yuan in a year, while this credit keeps 100 yuan as accounts receivable. Calculating gives an accounts receivable turnover ratio of 1,200 ÷ 100 = 12, meaning accounts receivable turns into cash 12 times a year.
If this person settles once a year, the accounts receivable turnover ratio would be 1,200 ÷ 1,200 = 1.

Thus, the lower the accounts receivable turnover ratio, the longer the collection period, and the slower the recovery of accounts receivable; conversely, the higher the turnover ratio, the shorter the collection period, and the faster the recovery of accounts receivable. This means that this indicator generally has a larger value.

Both companies have positive operating cash flow, and relatively speaking, Yanghe's cash flow is healthier than Moutai's.
In addition to the fact that positive operating cash flow is generally better, the positivity or negativity of investment and financing cash flow is hard to determine which is better; we also need to analyze based on the company's development stage, industry, and other specific information.
Finally, I remind everyone that some important data can also be found in the notes to the accounting statements, so it is worth browsing selectively.
Alright, let's summarize the content of this lesson:
Previously, we mentioned that stocks represent a portion of ownership in a company, and fundamental analysis aims to select a good company in a good industry when its stock price is undervalued, thus increasing our investment success rate.

Specific analysis includes both quantitative and qualitative analysis. We need to establish a manager's perspective to examine the company. A simple model is to use SWOT analysis to comprehensively analyze multiple factors for qualitative analysis.

From the data in financial statements, we quantitatively analyze a company. You can mainly focus on the three most important tables: the income statement, balance sheet, and cash flow statement. We have also compiled a table of important points for your reference, which you can find in the handout section.

What is the relationship between business logic and the three financial statements?#

From this table, we can see that the establishment of a company is either through "investor input" or "borrowed funds from creditors." The invested and borrowed funds can form the company's "assets."

However, assets are a resource that needs to be invested, and this investment is related to the company's overall strategy.

In explanation, a company actually has two ways to make money:
One way is through self-operation, which involves purchasing a lot of inventory, building factories, designing patents, and then operating independently. The other way is to invest or put money into the stock market, simply put, not operating independently but investing the money obtained into other companies or purchasing stocks. These two ways of making money determine that a company's assets can be divided into two major categories:

One category is "operating assets," and the other is "investment assets."

For example, if I want to establish a company and I invest 1 million yuan, I then have 1 million yuan in owner’s equity. To expand my total assets, I might use the 1 million yuan in equity as collateral to borrow 300,000 yuan from the bank. The borrowed money from the bank is my liability. Thus, owner’s equity and liabilities constitute a company's assets. The assets of this company are actually the resources it can utilize.

The resources of the aforementioned company amount to 1.3 million yuan, but this 1.3 million has two sources: 1 million yuan from the investor's input and another 300,000 yuan from the bank loan.

Once the company has assets, there are two choices.
The first choice is to allocate a large portion of the resources for self-operation, thus classifying the assets as operating assets.

The other choice is to invest these assets. Perhaps the 1.3 million yuan is divided into ten small parts, with one part being 130,000 yuan, used to invest in some startups. If one of these startups succeeds, it can also generate profits. The assets may also become investment assets.

When a company has "operating assets," it must engage in business, which must generate income. To generate this income, it will also incur corresponding "expenses and costs."

The difference between income and expenses is the profit generated from the company's operating activities, which I call "core profit."

"Investment assets" will yield "investment income." The core profit generated from operating activities and the investment income from investments together constitute the company's "operating profit." Once there is profit, it needs to be distributed as dividends or used to repay debts, so in the above diagram, you can see a blue line pointing to creditor borrowings and investor inputs.

"Core profit" is usually not shown in financial reports because operating assets correspond to the operating profit according to the original financial standards. However, since the current financial reports include not only the profits generated from operating assets but also investment income, a new term called "core profit" has been created specifically to correspond to the profits generated from operating assets.

With the blue part of the balance sheet and the purple part of the income statement, there is also a particularly important "cash flow statement," which is the brown part in the above diagram.
The company's resources are obtained in cash form, leading to "financing cash inflows." A company's assets need to be invested externally, so they are invested in its operating assets.

For example, it can invest in fixed assets or other enterprises, which are investment assets. Thus, there will be "investment cash outflows" as shown in the diagram.
Operating assets will generate income, and if we can receive cash from this income, it will result in "operating cash inflows." To achieve this income, certain expenses and costs will be incurred, and if these expenses and costs require cash payments, it will result in "operating cash outflows."

The net amount of cash inflows and outflows from operating assets forms the "net inflow of operating cash." If investment assets generate investment income, and if the income is realized in cash, it is the "net inflow of investment cash."

When a company has net inflows of operating cash and investment cash, it will consider repaying liabilities. Once repayment occurs, "financing cash outflows" will arise, whether in the form of dividends or cash payments, which also fall under "financing cash outflows."

Through this table, I hope to connect a company's primary business model and operational model with accounting. The blue part represents the balance sheet, the purple part is the income statement, and the brown part is the cash flow statement.

Accounting information is divided into three parts:
First, the balance sheet, with the most important equation being:
Assets = Liabilities + Owner's Equity, which is one of the two equations to remember.

Second, the income statement, which also has an equation: Revenue - Expenses = Profit. These two equations form the structure of the balance sheet and income statement.

The third is the cash flow statement, which includes operating cash flow, investment cash flow, and financing cash flow.

What is the difference between accounting and finance?#

What do the three financial statements in accounting information reflect about a company? Which statement is the most important? We need to address these questions first.
First, the income statement reflects a company's capability because it is based on effectiveness.
Generally, "you manipulated profits in this company" is a common phrase, while "you manipulated assets in this company" is rarely said. Why? Manipulating profits often reflects a lack of capability, and since there is a lack of capability, better profits are needed to compensate for this incompetence. Therefore, a company's income statement reflects its capability.
A company's cash flow statement reflects its vitality. Having good cash flow is the foundation for a company to maintain vitality, allowing it to "do whatever it wants."
As I mentioned earlier, if your company has profits but no cash flow, it essentially cannot do anything; having a pile of accounts receivable is useless.
Of course, you might say, "I can monetize it through supply chain finance," but the cost is very high.
Third, the balance sheet reflects a company's strength.
For example, if there are two companies, Company A has 1 million yuan in assets and also 1 million yuan in profits; Company B has 100 million yuan in assets but only 1 million yuan in profits. When evaluating the two companies, you might think Company A seems to be more profitable, but its strength is not as good as Company B, which has 100 million yuan in assets. We often say, "Your company is very strong," which actually refers to how much asset the company has.
Which of the three statements is the most important? From observing their history, we can know.

From another perspective, what is the income statement? The income statement actually reflects a subject in the balance sheet called the change in retained earnings; the cash flow statement also merely reflects a subject in the balance sheet, which is the change in cash.
From this perspective, the balance sheet is the core of the three statements, so when we analyze financial statements, we should start with the balance sheet.

What is the most important subject in the balance sheet?
Another very important point is that in financial statements, such as the balance sheet, there are many subjects. For example, a company has many assets, as well as many liabilities and owner’s equity. It is unlikely that we can understand all these asset items, liability items, and owner’s equity items at once.

We need to understand the most important issues. What are the most important items in the balance sheet? This can be viewed from the following two angles.
The first perspective

The third question is about the company's investment issues.#

To assess whether a company's investment situation is good, we mainly look at changes in the company's equity investments and changes in other receivables. We will discuss this in detail when we talk about investment assets.
The fourth question is about the motivation issue. There are two parts:
The first part is long-term loans, which are the long-term borrowings from banks to the company.

The second part is the shareholders' contributions. Many companies may not have operational risks or financial risks, but they may have governance risks. Such companies are quite common. If the relationships among shareholders are not well managed, it does not mean there are no good products; there may be products and production capacity, but if the relationships among shareholders are not harmonious, it could negatively affect the overall financial situation of the company. We will discuss this in detail later.

From this diagram, you can understand one thing: if you are the chairman, what aspects would you focus on?

The most important responsibility of the chairman is to mediate the relationships among shareholders, which is the motivation issue. Should we seek financing? If so, should we finance through long-term methods or issue new shares? How to set the price? These are all issues the chairman needs to consider.

The general manager should consider the production capacity issue, which is the potential of a company. A company may have good products, but as a general manager, I am more concerned about whether I will have good products next year, the year after, and three years later; this is the long-term production capacity issue of the company.

The vitality part is what an operations director should focus on. They need to constantly monitor whether the company's products are good, whether the short-term loans borrowed can support the company's operations, and whether the company owes money to its suppliers or has accounts receivable that have not been collected. This is something an operations director needs to keep an eye on every day.
The investment director, of course, needs to focus on the investment part. Thus, a balance sheet can reflect a company's strategic map through just a few key subjects.

A good company generally appears harmonious in every aspect. We will later look at some companies to see what a good company's balance sheet looks like compared to a poor company's balance sheet.

The second perspective:

The balance sheet can also be viewed from another perspective, based on the function of assets and the classification of liabilities. In this classification, we no longer differentiate between current assets, non-current assets, current liabilities, and non-current liabilities, but rather categorize assets into operating assets and investment assets.

1. If a company claims to be a self-operating company, its operating assets must exceed its investment assets. The operating assets must include five major operating assets, and their amounts should not be small. The first is monetary funds; the second is commercial receivables, mainly accounts receivable and notes receivable; the third is inventory; the fourth is fixed assets; and the fifth is intangible assets. Any company claiming to be self-operating must have these five major operating assets.

For investment assets, we mainly look at long-term equity investments, other receivables, and some prepaid accounts. What are prepaid accounts? It refers to cases where a parent company pays its subsidiary in advance, allowing the subsidiary to use it first. This is also a form of debt-like investment behavior.

2. Looking at liabilities, liabilities represent a form of credit, which can be divided into two types: bank credit and commercial credit.

Bank credit mainly includes short-term and long-term borrowings from banks.

To obtain bank credit, we often say we need to assess the company's "three qualities." First, assess the company's "reputation": Check if the general manager is reliable, if the chairman is trustworthy, and evaluate whether the team is dependable, as well as whether the company has a history of misconduct. All these factors are used to assess a company's "reputation."

Second, evaluate the company's products and their gross profit margins. Additionally, consider collateral; banks will inquire whether the company has collateral and will conduct due diligence to check if the collateral has been pledged elsewhere.

Commercial credit is also very important; it reflects a company's competitiveness in its supply chain. We can assess this through accounts payable, notes payable, and advance payments. Simply put, if a company can owe money to upstream suppliers while its downstream customers cannot owe money to the company, it indicates that the company has strong competitiveness and bargaining power in its supply chain, reflecting that it is a good company with strong product competitiveness.

How do the "balance sheet," "income statement," and "cash flow statement" connect?

These two diagrams illustrate the balance sheet. But how do we connect the balance sheet with the income statement and cash flow statement?

1. The first item to look at is "owner's equity." Owner's equity represents the contributions made by the company's shareholders, and the owner's equity can leverage a company's "assets." For example, if my company has 1 million yuan in shareholder contributions and I borrow another 1 million yuan from the bank, it means I have 1 million yuan in shareholder contributions, leveraging 2 million yuan in assets because I invested 1 million yuan and borrowed 1 million yuan from the bank, totaling 2 million yuan.
   Shareholder contributions leverage resources, and this "leverage" is what we refer to as financial leverage.

Financial Leverage = Assets ÷ Owner's Equity. The greater our financial leverage, the greater our leveraging effect.

2. Once you have certain assets or resources, whether you can gain access to the market is a significant issue. Many state-owned enterprises have abundant resources, but they struggle to penetrate the market.

Once there is a market and revenue, whether we can achieve profits and benefits is also a crucial question.

The process from "owner's equity" to "profit" involves leveraging "assets" through "owner's equity," which then generates "revenue," ultimately leading to "profit." This is a cyclical process. However, for all owners, the most important consideration is how much profit I make from the 1 million yuan I invested. In other words, investors are most concerned about the return on equity, also known as ROE, which is represented by the formula below:
Return on Equity = Profit ÷ Owner's Equity.
After a series of calculations,

Return on Equity = Profit Margin × Asset Turnover Ratio × Financial Leverage.
This method is very famous; everyone who does financial analysis knows this method, called the

DuPont Analysis.#

From the perspective of looking at financial statements, we start from the balance sheet, then analyze the income statement and cash flow statement. These three statements can be connected through DuPont Analysis.

Everyone has two identities: CEO and COO. One is responsible for "choosing," and the other is responsible for "operating."
First, let's talk about the CEO.

The most important job of a CEO is to make "choices," to "decide," or more drastically, to "let go."

For a company, the most important resources are "team," "time," and "cash." "What to do," "how to do it," "when to attack," "when to retreat," and "which are more important" are all choices that a CEO makes daily.
For individuals, in the long journey of life, the resources available for the CEO to make "choices" and "allocations" vary at different times.

Overall, these resources include: time, long-term relationships, and cash flow.#

How to choose? An important criterion is to measure using a "long-term perspective," whether for "people" or "things." I also have two personal tips: choose things that have "invisible effects" and choose things that have "short-term invisibility."

In the early stages of a career, most people do not have much cash to allocate. As a CEO, your most important resources at this time are time and work.
"What to do," "who to be with," and "how to allocate leisure time" are the most important "choices" for a CEO during this period.

If you are doing something you enjoy, if what you do has social value, if you are in a rapidly growing industry and company, and if your work environment and colleagues help you grow quickly, such choices are far more important than short-term salary levels.

Of course, what you do is important, and who you work with is also important. In youth, each person's values are still forming. At this stage, who you work with and what you do can have a profound impact on your future.

I have to quote what Buffett repeatedly mentions in his annual letters to shareholders:

We only want to work with people we like and respect. This not only maximizes our chances of achieving good results but also brings us extraordinary joy.

By the way, in the book "Outsiders in Business," the author also believes that among all studies on Buffett and Munger, this point is the most overlooked. He states, "In choosing to maintain connections with the best people and businesses while avoiding unnecessary changes, there is a compelling, intuitive logic. This is not only a path to outstanding economic returns but also a more balanced lifestyle. Among the many lessons they can teach, the energy derived from these long-term relationships may be the most valuable."

Let me give two examples of how to make choices using a "long-term perspective."

A few days ago, I was chatting with a friend about his previous experience with "part-time jobs." I do not agree with doing "part-time jobs" just for "money." The reason behind this is that as your own CEO, you should realize that most "part-time jobs" are typical "linear" behaviors, lacking accumulation and nonlinear potential. Although there may be short-term gains, it is not a good choice in the long run.

In contrast, if you use your spare time to learn things you are interested in and enhance your skills, this knowledge and growth will improve you and ultimately be reflected in salary, bonuses, stocks, and other external factors.

Additionally, as your own CEO, if you have investment experience and knowledge, you will have a deeper understanding of your value return cycle, enabling you to make better end-to-start thinking and decisions.

COO#

Now let's talk about the COO. Once your CEO identity has made the "choices," the COO's role is to firmly and focusedly "execute" and "manage" these "choices" well. I believe that as your own COO, the first thing is to be determined and focused.

Just like a company's strategy, whether it works often takes a long time; a person's "choices" are similar. If a choice is made but you cannot fully commit and focus on the present during daily work, you cannot take the "chosen path" to its fullest extent, making it impossible to determine whether the choice is good or bad.

Today, I was chatting with a friend, and I mentioned this to him. First, use your CEO identity to make "choices," and then with your COO identity, focus 100% on executing that choice.

Of course, the COO's focus is on "operations." I will continue to use investment as an example.

Do you remember the ROE (Return on Equity) model we discussed earlier? If you don't remember:

Return on Equity (ROE) is a measure of the return on investment relative to shareholders' equity, reflecting a company's ability to generate profit from its net assets. It is an important indicator of a company's profitability. The calculation method is to divide the net income after tax, minus preferred dividends and special income, by shareholders' equity. This ratio calculates the return on investment for common shareholders and is a key indicator of a listed company's profitability. A company's assets consist of two parts: one part is the shareholders' investment, i.e., owner's equity (the total of the shareholders' contributed capital, corporate reserves, and retained earnings), and the other part is the borrowed and temporarily occupied funds. Proper use of financial leverage can improve the efficiency of capital use; however, excessive borrowing increases financial risk, while too little borrowing reduces capital efficiency. Return on Equity is an important financial indicator for measuring the efficiency of shareholder fund utilization.

In simple terms:

1. Net Profit Margin = Net Profit ÷ Sales Revenue, indicating whether the company's products are profitable;
2. Asset Turnover Ratio = Sales Revenue ÷ Total Assets, indicating how many times the company makes money;
3. Equity Multiplier = Total Assets ÷ Total Owner's Equity, reflecting the size of the company's leverage. Not only do I make money with my own investment, but I also use borrowed money to make money. How much can I leverage external resources?

In financial statements, it is displayed as follows:

In actual calculations, average net assets = (beginning net assets + ending net assets) / 2.

Net profit is easier to understand: net profit = total profit - income tax expenses.

Total profit = operating profit + non-operating income - non-operating expenses.

From the result data, the distinguishing standard between good and mediocre companies is long-term ROE (Return on Equity).
For each of us, the same applies. If we view ourselves as individual companies, our "operating results" can also be represented as ROE. To manage our "company" well, the ROE of your "company" should exceed the average level (other people).

Breaking it down: ROE consists of profit margin, turnover rate, and leverage ratio. As a COO, what can you do? To improve turnover rate: you can enhance work efficiency and gradually take on more responsibilities and tasks;

To improve leverage ratio: you can help your team or build a personal brand, assisting your partners and others to become better. Sam Altman once said that the best way to increase leverage is to "help others selflessly and without expectations." This reasoning may seem convoluted; take your time to understand it.

Gradually, you will establish your competitive advantage. As a result of "operations," your ROE will significantly exceed that of others.

First Layer#

Dissecting ROE can quickly reveal a company's business model.
To create returns for shareholders, a company must enhance these three elements as much as possible. However, due to industry differences and variations in core business operations, this ultimately leads to differences in business models. Therefore, we can categorize A-share listed companies into three types of business models:

First Business Model: Companies with Pricing Power.#

Companies with this business model do not need to increase the equity multiplier by borrowing to operate the business and fulfill sales tasks, ultimately creating returns for shareholders. Such companies do not lack cash; their accounts receivable are almost zero, and they have bargaining power over their supply chain, often requiring upfront payment for goods.

Second Business Model: Efficiently Managed Companies.#

Companies with the second business model typically provide products or services that are in high demand and lack scarcity, mostly essential goods. Such companies do not need to frequently borrow from banks, and their cash flow is generally healthy.

Their concern is product homogenization and how to maximize efficiency through human management, leading to asset turnover ratios that surpass those of competitors. Many companies fall into this category; they cannot increase ROE by raising prices because their products lack scarcity. Therefore, they can only enhance asset turnover to generate high returns for shareholders. The number of quality companies in this business model is significantly higher than in the first business model, making them worth tracking.

Third Business Model: Cyclical Companies with Leverage.#

Companies with this business model typically belong to cyclical industries and use leverage to conduct their core business. For example, banks attract deposits by offering low interest rates to depositors and then lend or invest these low-cost deposits at higher rates for greater returns. Thus, the funds obtained from depositors are liabilities, and this industry generally has a very high debt ratio, averaging around 90%. The higher the debt, the greater the profit.

Three Different Business Models
Based on net profit margin, total asset turnover, and leverage ratio, we can distinguish three types of business models:
[ ] High Profit, Low Turnover
[ ] Low Profit, High Turnover
[ ] Leverage-Based

Basic pathways to wealth accumulation:

(1) Employment—Wealth Accumulation Subtraction#

The entry threshold for employment is not high, but it diminishes with time and opportunity. Successful individuals can turn simple addition into multiplication, even transforming it into an investment, such as promotions or changes in job roles,
like middle management, CEO, partner, etc.; while failures remain stuck in repetitive addition, and in harsh environments, may even face subtraction, such as severe inflation, layoffs, or industry changes.

(2) Independent Business—Wealth Accumulation Multiplication and Division#

The entry threshold for independent business is not low; it requires not only a clever mind but also high emotional intelligence, exceptional willpower, and significant energy expenditure. Successful individuals may have impressive wealth, but they are often physically and mentally exhausted, suffering from internal injuries.

(3) Investment—Wealth Accumulation Exponential Multiplication and Division#

Investment has the lowest entry threshold but permeates all aspects of life and human nature. Life is full of investments; successful individuals not only accumulate wealth but also experience significant mental and physical relief, enjoying a relaxed and pleasant life, steadily improving their quality of life; while failures face minor wealth losses, but their mental and emotional states are often completely shattered, living in a hellish existence with no hope of recovery.
Investment is a choice, a choice of your own life path;
Valuing investment means valuing yourself.