Tuesday, April 24, 2012

Financial Report - Cash Flow

I noticed tend to forget the important points when reading the financial report. Hence, decided to write down important points to take note when reading the financial report. This is for my own good and at the same time can help and share with those who are interested.

The last part of financial report is Cash Flow statement. No matter how good the asset, if the company cannot service its debt, the company will fall in default. From the cash flow statement, we can know if the cash is flow in or out of the company.

Cash Flow statement divided into 3 sections, namely, Cash Flows from Operating, Investing and Financing.
1. Cash Flow from Operating shows the net income and any depreciation or amortization add back.
2. Cash Flow from Investing usually show negative, as the money spend to buy equipment or spend to maintain those equipment, we call them Capex or Capital Expenditures.
3. Cash Flow from Financing activities record down all the dividend payments or the company buy back it's shares. Here if negative is good for investor. However if the company issue shares or bond to have the positive cash flow, it's not good for investor as their share holding are diluted, unless the company able to demonstrate this will create share holder's value.

We are more interested to know what is the Free Cash Flow for the company. The formula for Free Cash Flow is Cash Flow from Operating minus Capex.

Free Cash Flow = Cash Flow from Operating - Capex

Red Flag: Be aware if the Free Cash Flow have a big swing. For example, from 2.4 million suddenly drop to negative 3.4 million, this may sound like.... something fishy!

Financial Report: Balance Sheet

Next, we would like to know how much asset in the company. In this case, we need to study the second report, Balance Sheet. The name "Balance" because the report is prepared in such a way that, Asset is equal to Liability. When investor bring in $100k, from the company point of view, it's similar to borrow the money from the bank, hence record under the liability side. If the company use the fund to buy goods or equipment, the figure will record under "Asset" side as well. So the formula now become, Asset = Liability.

The left side is Asset (borrower) which represent where the money go to and the right side is Liability (Lender) which represent where the source of fund come from. That's why, when the investor bring money to invest in a company, it's similar to company borrow the money from investor and the company do not have the obligation to return you the money. (unless they do a capital repayment)

Taking the total Asset minus total Liability, we will have the net worth of the company. The net worth of the company sometime also know as "book value" or "share holders' equity".
Asset = Liability + Equity
By knowing the Asset and liability, we can always calculate Return on Asset (ROA) and Return on Equity (ROE). If ROE > ROA, means the company borrow money.

Another area we need to know is inventories or goods. Technically, the increase of inventories should be same pace as sales. Red flag: If inventories rise faster than sales, something is not quite right. Just imagine if Apple production line produce 10 billion of iPhone6 and put in stock room, this figure will record here. However, one year later, if nobody want to use iPhone anymore, all the inventories will become worthless!

Next is Account Receivable, we can know how much the company give credit to it's customer and how long the collected period.
Red flag: If Account Receivable increase in much faster pace than sales, something could be wrong! In the past, many company cook the book, sell something but not receive the payment and keep accumulated in account receivable, which create false signal that the sales and revenue of company is very good!

Prepaid expenses or payment in advance, if any figure, is sign that the goods sell like hot cake, meaning customers willing to pay in advance. This could mean the company's products are in good demand and having competitive advantage.

Financial Report - Income Statement

Since invest in stock is similar to taking the ownership, the first thing we need to ask is, "Is the company making any profit?" Then the second question is, "How much?"

In order to get the answer, the very first document we need to check is Income Statement. Sometime, it's also know as Profit and Loss Statement. It tell if the company is making money or not for that financial year.


Just take the Revenue minus Cost, this is profit we want. If nothing left after minus the Cost, it mean the company is not making any money. The below example shows the company's profit is $63,887k.

We can also use this report to find out the Gross Profit, by divide Gross Profit over Revenue. From here, we take 262/ 710 = 36.95%. Warren Buffet prefer the company with Gross Profit above 20%.  If you can find a company with > 40% Gross Profit, then it could be a good one. However, still need to review the Balance Sheet and Cash Flow Statement report to have the 3D point of view.

Tuesday, April 17, 2012

Invest in AirLine company?

Do you buy Airline stock? Or I should ask, if you have a spare fund, would you set up an airline company? For certain reason, I will NOT involve in the airline business or buy the stock, however, below preferred share (Mas-PA) is an exception.

Recently, one of my client told me, MAS-PA is going to expiry on Oct 2012. He gave me big thanks as I told him to buy MAS-PA two years ago when the news of Japan Airline break up, all the airlines' stock price around the world drop like no tomorrow. I still remember, that time, MAS-PA record lowest of 65 cents. With the price of 90 cents today, is it worth to invest for short term till October to get back RM1.00?

This report take from Philips Capital on 17 Apr 2012

If you are looking for very short term of 6 to 7 months of investment and satisfy with 11% for 7 months, or 18% per year, then, it's a good idea to invest in MAS-PA. I would think this is better than directly invest into MAS's mother share which currently cost you RM1.30. On maturity date, DO NOT convert to MAS share, but redeem it with RM1.00 is the better option. 

Monday, April 16, 2012

Don't lost your hard earn money!

There are so many types of investment, share, option, bond, currency, bank's cert, gold and ...The most common one, perhaps is gold. As a result, many of the so call "investment company" like to create this type of "product" to attract the "victim".
Usually they promise very good return. Few days ago, I meet with one client, who claimed he had joint the "venture" (Gold Mine) company which pay him dividend every month. In less than one year's time, he already took back all his principals and now he do nothing but the dividend keep on coming. To him this is passive income and he tried to convince me to invest into this company too. Wait, where's the money to pay the dividend  come from?

They promise pay dividend of more than 10% in the form of "paper gold" each month. The "paper gold" can be converted into credit which equal to USD. Sound great, ya! But I reject it. The reason is, basically, if the company can generate so good in return, why they need to find more investors to join them? They can easily borrow money from any bank, with the cost of less than 6%, why need to pay dividend of more than 100% to all those invest into their company? Even the country's most profitable business would not generate 100% of return in few months time!  

This could be another Gold Ptd Ltd or Oilpods or Sunshine Empire. There are always people who will believe their story and join them. As a smart investor, just think twice, how you earn the hard earn money, if it's so simple, everybody can just stop working! When something smell fishy, or something too good to be true, it probably is.

Saturday, April 7, 2012

Single Stock or Diversify better?

Nine months ago, i had a discussion with a friend, who own an inherited asset. The asset is actually in form of JobStreet's share which trade at Bursa with market value of RM240,000 at that time. We discussed the way how to maintain wealth in long term, I did suggest to him, instead of holding on a single stock, the other better option is switch to 3 different stocks. The reason is to have the better return (dividend rate of 7.51% to 8.25%) and at the same time diversify the holding into 3 Investment Grade Stock. However, he insisted that Jobstreet was inherited asset with intention to pass on to his next generation.
Since he disagreed with my suggestion, I could not do anything. I went home and draft 2 different portfolio. My plan is to keep on monitor from time to time. Below is the summary of his holding at that time (Jun 2011): 

"BC" portfolio, was the alternative portfolio which I suggested. If he agreed, he will need to sell "Jobst" and buy Maybank, Maxis and Arreit at the same time. All these 3 counter gave stable dividend income of 7.51 to 8.25%. 

Today (after 9 months), his portfolio look as below, if you notice, the total market value reduced by more than RM50,000 due to Jobst stock price decrease from RM2.80 to RM2.20. This is the risk of holding a single stock.

Now we compare what's happen to "BC" portfolio after 9 months:

The dividend received is 160.51% more than the single stock's portfolio. At the moment, seem diversify with different stable stock win the race for now. Again, we need to monitor for at least 3 to 5 years before we can conclude it.