When I bought Toronto-Dominion Bank (TSX:TD) shares six months ago, I bought them just because TD bank pays dividend and banks in Canada never go bankrupt. As a result, it is a decent investment as it would give me 3% return every year.
But after I read Warren Buffett’s book, I am wondering if I have made the right decision since Warren Buffett does not hold stock in every American bank.
Here are some accounting formulas to remember before we start the evaluation:
- Gross Profit = Total Revenue – Cost of Good Sold (Cost of Sales)
- Gross Profit Margin = Gross Profit / Total Revenue
- Per-share Earning = Net Earning / Shares Outstanding
- Current Ratio = Current Assets / Current Liabilties
- Return on Asset Ratio = Net Earning / Total Assets
- Debt to Shareholders’ Equity Ratio = Total Liabilities / Shareholders’ Equity
- Return on Shareholders’ Equity = Net Earning / Shareholders’ Equity
- Return on Capital Expenditure = Capital Expenditure / Net Earning
Looking at TD Bank’s annual report in 2016, the gross profit is basically total revenue because there is no cost of good sold.
28% of gross profit is used in selling, general and administrative expense, which is positive
10% of gross profit used in depreciation, which is positive
14% of gross profit used in interest expense, which is positive
26% of net income on total revenue, which is positive
$4.68 earnings per share, which is positive because there is an increase compare to 2015
So far, TD Bank (TSX:TD) is a good investment just based on our evaluation of the income statement. In the next part, we will interpret the balance sheet and cash flow statement.
Just a reminder that I am not a professional accountant. I did this evaluation based on the knowledge I learned from this book.
Please feel free to leave any comments! Catch you on the flip side!