If a business does well, the stock eventually follows... Warren Buffet
A friend of mine knew a guy for the first time in her life, she thinks he has it all; cute, charismatic, tall and great physique... For months, they dated. He brought her to Paris, brought her back to his place to meet his parents and she has decided that he was the one for her. Six months later, they were married. The story begins, he started beating her after coming home drunk, he lied to her about his company and the debt collectors came knocking on the door every now and then..
How nice if someone could give her a report of his background, career, character and reviews when they first knew each other. Better still if she has an idea of his debt ratio, total liabilities, total equities, cash flow and profit statement. haahaa
Top down approach
1. Economic Analysis
2. Industry Analysis
3. Company Analysis (Fundamental and Technical)
Fundamental Analysis---READING COMPANY'S ANNUAL REPORT
Success is built on strong fundamentals
I stressed the importance of reading the company's annual report. Totally. It is usually the only published document that provides investors an annual snapshot of the progress of the company where the financial statements, operational discussions and chairman's message are revealed. It may seem a little challenging to understand the reports but just follow the few steps below, and you will be doing fine.
Please take note that this is only for beginners and if you are interested in understanding a company's report in full details, you can find the information in this website.
http://eucon.listedcompany.com/misc/Reading_AR.pdf
? Where and how to get annual reports
---> Company's Website
---> National Library Singapore
Step one: Light reading
Read the chairman's message, business review, corporate developments and the outlook for the following financial year.
Tip: Choose a company in an industry you are familiar in.
Are you comfortable in the business model? If yes, let's carry on...
Step two: Find out about the company plans for the following year
Acquisition?
Expansion?
New products/new services launched?
If any of these are in the pipeline, has the risks been assessed?
If the risks are assessed, are there adequate measures taken to address the pending issues?
Step three: Financial Performance/Report
- Net profit/Sales: Increase year on year and the sustainability
- Cash flow from operating activites/investing activites and financial activites:
Companies with ample cash on hand are able to invest the cash back into the business in order to generate more cash and profit.
- Net debt: How much debt really exists? What kind of debt is it (long/short-term maturities)? What the debt is for (repay or refinance old debts)? Can the company afford the debt if it runs into financial trouble? And, finally, how does it compare to the debt levels of competing companies?
- Gearing Ratio: A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity provides a cushion and is seen as a measure of financial strength.
- ROE: The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Watch out if the ROEs decline with steadily rising earnings.
-Price to earnings ratio (P/E ratio): One of the most widely used ratios, it compares the current price with earnings to see if a stock is over or under valued.
Generally a high P/E ratio means that investors are anticipating higher growth in the future.
The average market P/E ratio is 20-25 times earnings.
The p/e ratio can use estimated earnings to get the forward looking P/E ratio.
Companies that are losing money do not have a P/E ratio.
Step four: Independent auditors' reports
Is the independent report clean as well?
Great! We are now done with the company's report. We cannot put all our eggs in one basket so we will be looking at portfolio diversification next.
www.sgx.com
www.investopedia.com
www.ibf.org.sg
A friend of mine knew a guy for the first time in her life, she thinks he has it all; cute, charismatic, tall and great physique... For months, they dated. He brought her to Paris, brought her back to his place to meet his parents and she has decided that he was the one for her. Six months later, they were married. The story begins, he started beating her after coming home drunk, he lied to her about his company and the debt collectors came knocking on the door every now and then..
How nice if someone could give her a report of his background, career, character and reviews when they first knew each other. Better still if she has an idea of his debt ratio, total liabilities, total equities, cash flow and profit statement. haahaa
Top down approach
1. Economic Analysis
2. Industry Analysis
3. Company Analysis (Fundamental and Technical)
Fundamental Analysis---READING COMPANY'S ANNUAL REPORT
Success is built on strong fundamentals
I stressed the importance of reading the company's annual report. Totally. It is usually the only published document that provides investors an annual snapshot of the progress of the company where the financial statements, operational discussions and chairman's message are revealed. It may seem a little challenging to understand the reports but just follow the few steps below, and you will be doing fine.
Please take note that this is only for beginners and if you are interested in understanding a company's report in full details, you can find the information in this website.
http://eucon.listedcompany.com/misc/Reading_AR.pdf
? Where and how to get annual reports
---> Company's Website
---> National Library Singapore
Step one: Light reading
Read the chairman's message, business review, corporate developments and the outlook for the following financial year.
Tip: Choose a company in an industry you are familiar in.
Are you comfortable in the business model? If yes, let's carry on...
Step two: Find out about the company plans for the following year
Acquisition?
Expansion?
New products/new services launched?
If any of these are in the pipeline, has the risks been assessed?
If the risks are assessed, are there adequate measures taken to address the pending issues?
Step three: Financial Performance/Report
- Net profit/Sales: Increase year on year and the sustainability
- Cash flow from operating activites/investing activites and financial activites:
Companies with ample cash on hand are able to invest the cash back into the business in order to generate more cash and profit.
- Net debt: How much debt really exists? What kind of debt is it (long/short-term maturities)? What the debt is for (repay or refinance old debts)? Can the company afford the debt if it runs into financial trouble? And, finally, how does it compare to the debt levels of competing companies?
- Gearing Ratio: A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity provides a cushion and is seen as a measure of financial strength.
- ROE: The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Watch out if the ROEs decline with steadily rising earnings.
-Price to earnings ratio (P/E ratio): One of the most widely used ratios, it compares the current price with earnings to see if a stock is over or under valued.
Generally a high P/E ratio means that investors are anticipating higher growth in the future.
The average market P/E ratio is 20-25 times earnings.
The p/e ratio can use estimated earnings to get the forward looking P/E ratio.
Companies that are losing money do not have a P/E ratio.
Step four: Independent auditors' reports
Is the independent report clean as well?
Great! We are now done with the company's report. We cannot put all our eggs in one basket so we will be looking at portfolio diversification next.
www.sgx.com
www.investopedia.com
www.ibf.org.sg
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