Sunday, July 24, 2011

Back to basic - Invest in a business

Nothing is so hot! ... Apple, everyone is talking about it right now, because of iPhone and iPad sold like hot cake! That's why the share price jump to history record, close at US390! Many analysis give the target price range from $480 to $525, do you think it's a good buy?

You can find the answer by referring to 3 basic financial reports. How you know if a company is making money? Just look at the Income Statement or sometime we call it Profit and Loss Statement. The top part is Revenue and Expenses. Well the most important data is profit... Yes, the profit is real, without profit, the rest no need to see, not even think about buying the stock.

Want to know how much the Asset? Just look at Balance Sheet. Why call this Balance Sheet? Because you always find this report Asset = Liability, balance at both side. As a share holders, the company actually borrow money from you, but the company no need to return it. That's why the formula look like this:
Asset = Liability + Equity 

Sometime Equity we also call it Share Holder's Fund. If the company borrow money from the bank, it need to pay interest, but if it borrow from Share Holder, it does not require to pay back or give any interest.  Only some companies is kind enough to give out some dividend. This is a disadvantage to share holder and as a share holder, he can only sell this "ownership" / shares in the Stock Market. That's why for the reason, investor should invest the company with a lot of profit as only with profit can help the company grow big in term of Asset and Share price will eventually being reflected. In theory, we need company with minimum Liability, so that ROE and ROA almost the same and balance formula look something like below:
Asset = Liability + Equity 

Finally, the last report, Cash Flow. The company must able to generate positive cash flow in order to fund and continue to grow big. Beware of financial fraud too, the account Receivable and Liability should not grow bigger and bigger, if any, should read as a red flag, avoid it no matter what.

Once you understand these simple report, you will know the answer if Apple is worth to buy or not!
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1 comment:

  1. Why not invest in a business? Your help in setting up an entrepreneur's startup will not only benefit his business, it will also turn you a profit!

    ReplyDelete

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