Philip Fisher - Fifteen Points to Look For in A Common Stock

Point 1 - Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

Ignore one time gain, it needs to be sustainable increase in sales. Also, it needs to consider the industry cycle. If the industry is at its infant stage, there is a lot of growth. Once it reaches the plateau, there will be minimum growth, follow by decline. When Iphone first introduced to the market, Nokia phone went into decline stage. However, after years of extraordinary growth, other competitors start to enter the market, for example, Xiaomi and Samsung want to have a piece of the market share.

You need to believe in the company's future sales curve. If a company's management is outstanding and the industry is one subject to technological change and development research, the shrewd investor should stay alert to the possibility that management might handle company affairs so as to produce in future the type of sales curve, this is the first step towards choosing an outstanding investment.

Point 2 - Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

The management will improve old products and develop new ones. The investor usually obtains the best results in companies whose engineering or research is to a considerable extent devoted to products having some business relationship to those already within the scope of company activities. Point 2 focuses on management attitude. Does the company recognise in time it will almost certainly have grown up to the potential of its present market and that to continue to grow it may have to develop new markets in new future?

Point 3 - How effective are the company's research and development efforts in relation to its size?

On the surface, it requires comparison of the research expense with respect to sales and whether this creates a competitive advantage over other competitors. The management needs to coordinate diverse technical skills into a closely knit team and stimulate each expert on that team to his greatest productivity the only kind of complex coordination upon which optimum research results depend. In addition, the coordination with top management is critical to maximise efficiency of commercial research.

Point 4 - Does the company have an above-average sales organization? 

Without sales, the company's survival is impossible. Many things are important to corporate success, sales, production and research are important elements. For steady long-term growth, a strong sales arm is vital.

Point 5 - Does the company have a worthwhile profit margin?

High-profit margin is often eroded when new competition enters the market, increase in cost and other various reason. If you observe that the company is able to maintain high-profit margin over the years, it is a good sign that the company possesses a strong competitive advantage. Stay away from low-profit margin or marginal companies.

Point 6 - What is the company doing to maintain or improve profit margin?

Certain companies manage to improve profit margins by capital improvement or product engineering improvement. They aim to reduce costs to offset the rising trend of wages. The investors should give attention to the amount of ingenuity of the work being done on new ideas for cutting costs and improving profit margins.

Point 7 - Does the company have outstanding labor and personnel relations?

An investor should be sensitive to the attitude of top management toward the rank and file employees. Workers are readily hired or dismissed in large masses, dependent on slight changes in the company's sales outlook or profit picture.  Nothing is done to make ordinary employees feel they are wanted, need and part of the business picture. Management with this type of attitude does not usually provide the background for the most desirable type of investment. 

Point 8 - Does the company have outstanding executive relations?

The company offering greatest investment opportunities will be one in which there is a good executive climate.

Point 9 - Does the company have depth to its management?

Once a company reaches a size where it will not be able to take advantage of further opportunities unless it starts developing executive talent in depth. Does top management welcome and evaluate suggestions from personnel even if, at times, those suggestions carry with them adverse criticism of current management practices?

Point 10 - How good are the company's cost analysis and accounting control?

Only when the company is able to capture a clear picture of financial status, with precise knowledge of true cost in relation to other factors, then they can establish correct pricing policies, focus special attention for planning.

Top management needs to understand the importance of accounting controls and cost analysis.

Point 11 - Are there other aspects of the business, somewhat particular to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

Look at the lease of the land, building, insurance cost relative to others, patents and other competitive advantages.

Point 12 - Does the company have a short range or long range outlook in regard to profits?

Relate this to a salesman, whether he is here to build a relationship with you to serve you on a long term basis or he is just here for the quick bucks. The difference in treating the customers is noticeable.

Point 13 - In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth?

If borrowing power is not sufficient, however, equity financing becomes necessary. The attractiveness of the investment depends on careful calculations as to how much the dilution resulting from the greater number of shares to be outstanding will cut into benefits of existing shareholders.

Point 14 - Does the management talk freely to investors about its affairs whe things are going well but "clam up" when troubles and disappointments occur?

How a management reacts to circumstances can be a valuable clue to the investor. The management that does not report as freely when things are going badly as when they are going well usually "clams up" in this way. There is no sense of responsibility to stockholders.

Point 15 - Does the company have a management of unquestionable integrity?

This is by far the most important question. Integrity speaks more than any other issues presented.

Singtel 9MFY3/17

·9MFY17 core earnings are within expectations

·3QFY17 core earnings were up 4.2% YoY (+3.6% YTD) on lower financing cost and stronger associate contributions 

·3QFY17 core EBITDA was stable YoY (-1% QoQ), supported by cost rationalisation initiatives, notwithstanding the topline pressure (-2% YoY) from stronger competition affecting Optus. On a constant currency basis (AUD gained  3% QoQ against the SGD), group revenue would have dipped 4% YoY. 

· Regional associates remained the bright spot with contributions up 3% YoY in 3QFY17 (+ 9% YTD), led by Telkomsel (+31%) which offset the intense price- focused competition by new 4G entrant, Reliance Jio, affecting Airtel (-27% YoY) 

I believe market is expecting Singtel to spin off NetLink Trust and this will create a special dividend. I like this business, superior cash flow and debt level is not as high as its counterparts in Singapore market. In the near future, I will definitely attend their AGM and question how the CEO deploys the cashflow. It is also not ideal to leave too much cash in the company pocket and spend unwisely to fatten the management's purse is not a good thing. I will like Singtel to issue a higher payout or acquire selective telco/companies.

I just check SGX platform and Singtel has purchased 232,563 shares on 10/2/2017. Good stuff!

I hope Temasek will "Make Singapore Great Again"!

Myanmar Related Stocks

I was chatting with my friend on whatsapp and he is looking into emerging market Myanmar for investing idea. I went to google and saw this article from Fool.sg. Out of the 3 stocks, I only took a glance at Yoma and Singapore Myanmar Investco which have significant portion of their revenues from Myanmar.

1) Yoma Strategic Holdings Ltd (SGX:Z59)

Yoma is an investment holding company that has revenues from real estate, tourism, agriculture and transport. 

The company is leveraging its experience and network in Myanmar to partner with prominent multi-national companies to penetrate their business into the market. For example, Yoma collaborates with US-listed Yum! Brands Inc to bring its franchise KFC restaurants into Myanmar. Its KFC network has grown to seven stores and a quarterly revenue run rate of SGD 2.7m. Yoma has a JV with Mitsubishi Corp to distribute vehicles in the country.

From Yahoo stock screener, it shows that Yoma has a consistent upward trend for Gross Profit since 2013 to 2016. Net Income shows a straight upward line. Its Total Liabilities has tripled from 2014 65,000 to 2016 212,000. Yoma does not have positive cashflow yet. Yoma's new businesses will incur losses in the near-term and requires the necessary infrastructure to sustain long-term growth.

Personally, I do not agree with the remuneration system that is currently in place. It is not aligned with Shareholders' interest.

2) Singapore Myanmar Investco Ltd (SGX: Y45)

Singapore Myanmar Investco Limited, formerly Singapore Windsor Holdings Limited, is an investment holding company. The Company's segments include Trading of industrial products; Trading of F&B products; Provision of telecommunication towers and related services; Europcar rental vehicles, and Duty free and retail operations. It offers travel and fashion retail, which includes airport retailing; auto services, which provide car rental and limousine services-Europcar sole franchise; construction services, which distribute sany construction equipment and spares; food and beverage, which imports and distributes food and beverage products, and franchises; infrastructure services (telecom services), which own telecom infrastructure; infrastructure (logistics), which includes logistics and warehousing services in Myanmar; serviced offices, which provides serviced offices, and telecom equipment services, which distribute business-to-business telecommunication products and services.

In November 2016, Singapore Myanmar Investco has issued placement shares of S$0.42 to raise S$16.5 million to fund its expansion plans in Myanmar. Singapore Myanmar Investco is making effort to reduce its debt level since 2013 till 2016. The debt level is seen to reduce from 260,000 to 23,000. The company is still in growth stage and does not have positive cash flow. 

I like the Myanmar story and believes that it is a land of opportunity but the financial numbers from the above two companies are not convincing for me to invest my money. 

Stock Research Checklist - Equity

Return on Equity is how much profit the company is generating with the shareholder's money. As a shareholder, you can earn lot of money over time with a company that has a high ROE.

What is the Company's ROE for the last 10 years? Does it trend upward?

ROE = Net Income / Share Holder's equity

In EPS, management can do financial engineering to increase the figure over time, without increasing the earnings. If they buy back shares, which causes the EPS to increase. Buying back shares is a good thing for the company and shareholders but the intention to increase the EPS is not good enough. If the company uses more debt, it can generate a higher ROE. Generating a high return on equity with reasonable debt is a good thing.

Does the Company have more equity when compared with Long Term Debt?

Debt-to-equity ratio is one of the most important figures to examine. You need to look for companies with more equity than debt. That kind of company has a strong balance sheet, and investors do not need to worry about leverage problems. This kind of company makes more money for long-term shareholders.

When a company has more debt than equity, especially when the economy starts to slow, the company may feel financial pressure to make the interest payments or run the risk of violating the financial covenants. Situations like that quickly reduce stock prices, and long term shareholder values can be destroyed in short period of time. When a company uses leverage, it can generate more revenue and that revenue flows to the bottom line as earnings. If those extra earnings are sufficient enough to service the debt, pay down the principal debt balance and also add more earnings to the company, that is good.

If company has enough cash to cover the short-term debt, we can omit the short-term debt and use the long-term debt as the debt for calculations . Debt and equity ratio varies for different industries.

Stock Research Checklist - Debt

Debt
Debt is an important part of business. If it manageable debt, then it is acceptable. If the debt load is very high, it will be very hard for that business to succeed, sometimes the company will even end up in bankruptcy. The investors will end up losing all their money. Some industries are capital intensive, they have to use debt to finance their capital investment apart from equity capital. For example, industrial and manufacturing companies need to invest large amounts of money for factories in order to keep them up to date.

Does the Company have Manageable Debt?

If you find a capital intensive business at a bargain price. Here you can compare that company's debt level with a direct competitor. If the company can pay off total debt with five years of net income, then that should be a manageable debt. Find out when the current debt is coming due. If any debt is due within a couple of years, what kind of plan does the company have to pay off that loan? When the company has debt as a bond, it is less risk to the company. Long term bonds are a good kind of debt to have.

The economy goes through life cycles: recessions, recoveries and boom periods. If a company loads up on too much debt during boom years, it can generate a higher revenue and be able to service debt. When it enters into a recession, it will be hard to cut costs and reduce the debt as fast as the revenue decreases. It will be hard to handle the debt when the recession period starts.

Does the Company have Manageable Short-Term Debt?

Short-term debt translates into whatever debt a company needs to pay before one year. It appears on a balance sheet's current liabilities. This may be interest that needs to be paid on long-term debt. If any debt comes due, the company should have money to cover that debt. The company should have cash and cash equivalents, short-term investments, accounts receivables, hidden assets and cash flow numbers to pay the short-term debt. If the company does not have enough cash to cover that short-term debt, do not even look at the company because it may a sinking ship.

What is the Company's Current Ratio?

Current ratio helps you to find out whether or not a company has the ability to pay current obligations.

The formula of Current Ratio = Current Assets / Current Liabilities

What is the Company's Long Term Debt? Is it Manageable?

As a first choice, investors should look for companies that do not have long term debt. The companies may not have long term debt for any of the following reasons.

1. The company is operating in an industry where it does not need to spend a lot of money on capital expenditures.
2. Search for these kinds of companies because they can create more shareholder value over the long term. There is no risk of default because they have no longer term debt. Plus, company earnings are not reduced because of interest payments on long term debt.
3. The company may be in a sustainable competitive position to earn a higher profit and, in turn, generate a higher cash flow every year. Management can fund the growth of the company from existing cash flow rather than relying on debt. This kind of business is good and generates higher shareholder value over the long term.
4. When the input costs increase, sustainable-competitive-position companies can raise the prices and still maintain a decent profit. That is, management can expand the company via internal growth and spend capital expenditures from company profits rather than depending on debt. Companies like this can generate excellent value for shareholders over the long term. If you can identify companies with no long-term debt and a competitive position at attractive pricing, you should invest and hold those companies for the long term to generate a great return.

Reasonable debt means the company is able to repay the whole long-term debt within four or five years of net income. The best kind of debt is in corporate bonds with long term maturities and low interest rates. Investors cannot demand the principal payments immediately and also management can defer the interest payments.

Does the Company Pay Little or Not Interest Expense?

Durable, competitive companies pay little or no interest expenses for their short and long term debt. If a company does not spend money on its interest expense, this is good because it is a zero debt company. Reasonable amount of interest expense is acceptable, need to find out what percentage of operating income is spent as an interest expense. Determine whether this is consistent percentage or going down. If it is going up, this is a bad sign.

Does the Company have Preferred Shares?

Preferred shareholders have a higher claim on the capital structure of the company. They get paid a fixed dividend and have conversion rights to common stocks. If the company is in liquidation, preferred stockholders will have claim before the common stockholders get paid. This form of preferred stock is a costly form of debt because the company needs to pay the interest and have an equity appreciation potential for the preferred stockholders.

Stock Research Checklist - Earnings

Examine Earnings Growth 

Earnings Per Share (EPS) = Company Net Income / Number of Shares Outstanding

When you are using the number of outstanding shares, use the fully diluted shares instead of outstanding shares)

Here is the calculation to get the EPS growth rate

FV = Future EPS value

PV = Current EPS value

N = Number of years

As an investor, you need to question the reason when the earnings drop. Does the company have a temporary problem or is it going to produce reduced earning s in the company years? You need to read the annual and quarterly reports, listen to the company's conference calls, you will be able to find the reason for the revenue and earnings decrease. Always look for consistent earnings growth from a company so that you can reasonably predict the future earnings of the company.

How Does the Company Use the Retained Earnings? Do the Retained Earnings Reflect in the Stock Price?

When the management of a company invests earnings back into the business, that investment should yield a higher return because of retained earnings. When the management does a great job using retained earnings, it will increase the earnings of the company and in turn, increase the earnings per share.

Market price does not reflect the true value of the company in the short term. If you are looking at 10 years or more, market price will reflect the true value.

What are the Company's Owner Earnings for the Past 10 years? Does It Grow Consistently?

"Owner Earnings" are the earnings the owner can keep after the capital expenditure. The formula to calculate the owner earnings

Owner Earnings = Net Income + Depreciation & Amortization - Capital Expenditure

If the owner income trend increases over time, you can project the approximate owner income for the future. The number is not perfect.

What is the Company's Recent Earning Momentum? Is it Comparable to Its Long Term Growth Rate?

An investor's portfolio should contain some percentage of large capt stocks. When the market is in a downturn, these established company stocks go down less when compared with small or mid cap stocks. When you are researching established companies to invest in, one of the important tasks is to find out if a company's earning momentum matches with its long term growth rate. When the company is small, its growth rate may be very high. It grows very fast and reaches mid-cap status. When a company is a large cap, its growth rate may not be as high as small and mid cap growth but there will still be growth. The growth may be through internal expansion like expanding to new parts of the world, introducing new products, or entering new markets. The other part of expansion is through acquisition.

When you are researching a company, you need to find out if the company's growth rate in recent years matches with its long term growth rate. If the company keeps earning momentum, that is great and the company has passed this checklist item.

Does the Company have any One-Time Event that Recently Increased Earnings?

When you are analyzing a company's stocks, you need to find out if there were any one-time event that increased the company's earnings recently. If there are one-time events, you need to remove those earnings from your calculation of historic earnings so you can project the earnings conservatively. One time events could be a sale of asset and a big order from a particular customer.

What is the Company's "Operating Cash Flow"? Does It Grow at a Constant Rate?

Operating Cash Flow is cash generated from the company's operations. Cash flow numbers are calculated from net income, depreciation and adjustments to net income, changes in accounts receivable, changes in liabilities, changes in inventories, and changes in other operating activities. Cash Flow should be positive.

How has the Business Performed in Previous Recessions?

All companies need to perform in all business conditions. When the economy is on upswing, all businesses do very well. But you need to identify the company that has done better when the economy is in a state of recession, that company is the real winner.

Does the Company have Client Concentration?

Investors need to analyze the company's client base. Suppose the business is earning more than 10 percent to 20 percent of the earnings derived from the particular customer, that is a disadvantage.

1. The end customer can demand price reductions, which will affect the profit margin of the company because the big customer knows that the company relies on them heavily.
2. If the end customer's business depreciates , your company revenue will also come down which is not a good thing.
3. If that customer cancels the contract, there will be a big hit to the company's earnings.

Stock Research Checklist – Business Characteristics

Are you able to understand the Business Thoroughly? Is it a Simple Business?

What are the company products? How does the company generate revenue? How is the company market its goods and services? What is the competitive landscape of the business? Do you understand the business life cycle?

Companies that are involved in simple type of business tend to perform better in the long run. Business in the high tech industries where product life cycles are short, if they do not innovate the next product before end of its current cycle, it risk compromising its revenue and earnings.

We mentioned previously about business moat, there are two different types of businesses, one is difficult to replicate and other is a commodity type business. Hard to replicate business will have strong brand name, patents, and asset intensive which gives a competitive advantage. Commodity type business produce products with no difference from competitors's products. Commodity type business needs to be the lowest cost producer to fight the price war and it needs to be the largest size to demand best rates from its suppliers and distributors to compete on prices.

A non exciting industry can enjoy higher margin as lesser competition enters the arena and the company is able to build its market share over time, creating a moat to fend off later entrants. Not many entrepreneurs will like to enter non exciting industry. Young people like to run tech start ups rather than engage on a lumber business which can enjoy high margin.

Dirty type of business will not have new competitors entering the market will enjoy strong margin. For instance, waste management, cleaning services, and funeral business.

If the business has a chain of companies, is it successful in multiple locations before expanding nationally? IF you get into any of the successful chains in an initial period and hold the shares until they open for business across the nation, you can make tremendous amount of money. These types of national chain companies are available in retail companies.

Cash Flow Statement

The Statement of Cash Flows

This statement shows the value created by the company based on how much cash generated year to year. This is the most important section of the financial statements. The cash flow statement strips away all the abstract, non cash items such as depreciation which you see on income statement and tells you how much actual cash the company has generated. The cash flow statement is divided into three portions: cash flows from operating activities, from investing activities and from financing activities.

1st Section - Cash flows from operating activities

Cash Flow from Operating Activities tells you how much cash the company generated from its business. This is the area to focus your attention on the cash generating power of business that we are most interested in.

Depreciation and Amortization

This is not a cash charge. So we need to add this back to net income.

Changes in Working Capital

If a company is owed more money by customers this year than it was last year, accounts receivable increase and cash flow decreases, if it owes more money to suppliers, accounts payable increase and so does cash flow. Finally if a firm pumps more money into inventory that does not sell, cash flow decreases. Inventory ties up capital.

One-Time Charges

This need to be added back when figuring cash flow (similar to depreciation, which is also noncash).

Net Cash Provided by Operating Activities

This is also known as operating cash flow, it is the result of adding or subtracting the previous items from net income. It doesn't replace net income but if you don't look at it in addition to net income, you are not getting the full picture.

2nd Section - Cash Flow from Investing Activities

This section involves acquiring or disposing PP&E, corporate acquisitions and any sales or purchases of investments.

Capital Expenditures

This figure represents money spent on items that last a long time such as PP&E, basically anything needed to keep the business running and growing at its current rate. Operating cash flow minus capital expenditures equals free cash flow, or the amount of cash the company generates after investing in its business.

Investments Proceeds

Companies often take some of their excess cash and invest it in bonds or stocks in an effort to get a better return than basic saving account. This number tells us how much money the company has made or lost on such investments.

Final Section - Cash Flow from Financing Activities

Financing activities include any transactions with the company's owners or creditors.

Dividends Paid

This is the money spent on dividend.

Issuance/Purchase of Common Stock

This is important number to look because it indicates how a company is financing its activities. Rapidly growing companies often issue large amount of new stocks which can dilute the value of existing shares but gives cash for expansion. Slower but more mature companies that generate a lot of free cash flow tend to buy back significant amounts of own stocks though companies that issue many stock options to their employees also buy back stock to minimize dilution. You need to be wary of companies that grant their employees with options and then spend corporate cash on repurchases are essentially selling shares to their employees at low prices and buying it back on the open market at much higher prices at the expense of shareholders.

Issuance/Repayments of Debt

This number tells you whether the company has borrowed money or repaid money it previously borrowed.

Income Statement

The Income Statement

The Income Statement explains how much money the company is making or losing.

Revenue

Revenue also known as sales is how much money the company has brought in during a quarter or a year. Larger companies sometimes break down revenues on the income statement according to business sector, geographic region or products versus services. You will need to understand how revenue is been recognized in the financial statements, companies can record revenues at different times depending on business they are in.

Cost of Sales

Otherwise known as Cost of Goods Sold, represents the expense involved in creating revenue such as labor costs, raw materials or whole price of goods. Large companies combine manufacturing with services sometimes break down this number into cost of goods sold and cost of services.

Gross Profit

It is not a number on Income Statement but can be derived by revenue minus cost of sales. Once you have gross profit, you can calculate gross margin which is gross profit as a percentage of revenue. A more differentiated product or services will have a higher gross margin than its competitors.

Selling, General, and Administrative Expenses (SG&A)

This is known as operating expenses which includes items such as marketing, administrative salaries and research & development. If you see a forecast in decrease in SG&A, the company may be reducing headcounts. To analyse efficiency of a firm, you can look at SG&A as a percentage of revenues, a lower percentage of operating expenses relative to sales mean a tighter and cost effectiveness. You need to compare the company with the nearest competitors.

Depreciation and Amortization

When a company buys an asset intended to last a long time, such as a new building or a piece of machinery, it charges a portion of the cost of that asset on its income statement over a series of years. It is always included in the cash flow statement, you can look there to see how much a company's net income was affected by non-cash charges such as depreciation.

Nonrecurring Charges/Gains

This is the area where companies put all one time charges or gains that is not the norm such as cost of closing a factory or gain from selling a business. It is preferred not to have this section in the Income Statement.

Operating Income

This number is equal to revenue minus cost of sales and all operating expenses. It represents the profit the company made from its actual operations, as opposed to interest income and one-time gains. Companies often include nonrecurring expenses in figuring operating income, and you have to add back one-time charges. Operating income excludes one time items as well as income from non-operational sources such as investments, you can use it calculate operating margin which is  comparable across companies and industries.

Interest Income/ Expense

Sometimes Interest Income and Interest Expense are listed separately and sometimes they are combined into net interest income. In either case, this number represents interest the company has paid on bonds it has issued or received on bonds or cash that it owns. You can get some insight into the financial health of a firm by looking at its earnings before interest and taxes relative to its interest expense which is called an interest coverage ratio.

Net Income

This number represents company's profit after all expenses have been paid and it is the number most companies highlight in quarterly earnings. Net income can be distorted by one-time charges and investment income.

Number of Shares (Basic and Diluted)

This figure is the number of shares used in calculating earnings per share, it represents the average number of shares outstanding during the reporting period. Basic shares include only actual shares of the stock. Diluted shares include securities that could potentially be converted into shares of stock such as stock options and convertible bonds. Given the amount of granting of stock options that occurred over past years, it is the diluted number that you will want to look at because you want to know the degree to which your stake in the firm could potentially be shrunk or diluted if all those option holders converted their options into shares.

Earnings per Share (Basic and Diluted)

This number represents net income divided by number of shares. You need to look at cash flow and many other factors when considering EPS. This number does not represent all of the corporate financial performance.

Balance Sheet

The Balance Sheet

The balance sheet tells you how much a company owns in its assets, how much it owes in its liabilities, and the difference will be equity. Equity represents the value of money the shareholders have pumped into the company.

Assets - Liabilities = Equity

Current Assets

Current Assets are used up or converted into cash within one business cycle which is usually one year. The major portions of this category are cash and equivalents, short term investment, accounts receivables and inventories. Cash and equivalents and short term investments refer to items which can be liquidated quickly into cash. Short term investments is similar to cash such as bond with less than a year to maturity and earn a higher rate of return than cash.

Accounts Receivables are bills that the company has not collected but expects to be paid soon. If accounts receivables rise faster than sales, the firm is trying to get sales but relaxing its payment terms. When you see an "Allowance for Bad Debts" is the company's estimate of how much money is owed by customers which is unlikely to be paid.

Inventories include raw materials which has not been made into finished product. Inventories are important to monitor for manufacturing and retail companies. Inventories require cash which will deprive the company from other opportunities to make profit. The less time cash is tied to inventory will have a larger impact on profitability.

Non-current Assets

Noncurrent assets are assets that are not expected to be converted into cash or consumed within reporting period. This section consist of property, plant and equipment (PP&E), investments and intangible assets. Property, plant and equipment are long term assets which consist of land, buildings, factories, furniture, equipment and machinery. Investments is money invested into long term bonds or other companies. Intangible assets consist of goodwill which is accounted for when one company acquires another.  Goodwill is the difference between the price the acquiring company pays and tangible value of the target company. Goodwill is the area to scrutinize, very often company overpay their target acquisition.

Current Liabilities

Current liabilities are money the company expects to pay out within a year. You should focus on accounts payable and short-term borrowings/payables.

Accounts Payable are bills the company owes to somebody else and are due to be paid within a year. Large companies can delay paying their subcontractors or suppliers which means holding on to their cash longer which is better for cash flow management. Short-Term borrowings/ payables refers to money the company has borrowed for a term of less than a year to meet short term requirement. This can lead to financial crisis if the company does not have sufficient cash or means to refinance.

Non-current Liabilities

Noncurrent liabilities are money the company owes one year or more in the future. The key is long term debt which represents money the company has borrowed by issuing bonds or from bank which does not need to pay back for a few years.

Shareholders' Equity

The only account worth looking at is retained earnings which basically records the amount of capital a company has generated over its lifetime minus dividend and stock buybacks. Retained earnings is a cumulative account, each year when the company makes money and does not pay it all out as dividends, retained earnings increase. If company loses money over time, retained earnings can turn negative and become "accumulated deficit".

Annual Reports

Reading Annual Reports

A company's financial reports are akin to a medical report of a person, it will display the health status. The financial reports consist a lot information which involved the management team and financial statements. Financial reports help the investor to make the decision whether the company is still worthwhile to invest in or it is time to take flight.

Potential investors of a company can download the annual report from SGX website or company website's investor relations page. The annual report is released after financial year and there will be quarterly interim reports for investors to monitor the business.

The corporate profile shows the business the company is involved in, it will describe the various business segment and business outlook. The financial highlights will provide a summary of the key financial metrics on revenue, profit and dividend payouts. This will show to investors how well the company has performed over the past few years.

On Chairman's statement, it will be prudent to read through past years statements to see whether there is a consist message on the business plans. If the company mention that they are doing a turnaround strategy then you can understand the actions taken and whether it is on track or some how it has been derailed. A change of tone will show whether the business has became more optimistic or pessimistic.

We will focus on the financial statements in the next post as this is the crux of the annual report. The three main sections consist of Consolidated Income Statement, Balance Sheets and Consolidated Statement of Cash Flows. It is important to look at the notes below each page of the financial statements. They show detailed explanations on how the figures are derived and assumptions made during the compilations.

In conclusion, when you download the annual reports of interested or invested company in the future, do spend time to decipher the documents. There are a trove of treasures hidden in each annual report.