Learning Series: Profit from Red Flags – #1

Today is the day when I turned 30. In addition to weekly articles on stocks/market updates, I have decided to give everyone a special present by way of kick starting “InvestWhizz – Learning Series”. I am pleased to share that the first series would be: “Profit from Red Flags!”

(will continue writing this only when there are > 50 likes, so please do share with your peers for us to learn and grow together!).

 

 

Introduction

 

Many people have learnt Fundamental Analysis and Technical Analysis and are investing basis that. However, how much focus did we ever put on validating on the reliability of The Financial Statements?

You may be wondering, why some stocks can go bust overnight? Or why certain companies can grow so well?

 

In fact, most of the answers are embedded in the Financial Statements. However, not many people out there know how to uncover the underlying secrets within the set of Financial Statements.

 

Financial statements are like a set of Bible for business and top management such as Chief Executive Officers (CEOs), Chief Financial Officers (CFOs), are making business decisions basis that.

 

Some of the common questions asked by these leaders include:

 

Does the company have enough resources to expand our business?

Do we have enough cash to repay our suppliers?

Should we take more loans?

 

These questions would not be answered without the Financial Statements. No matter how good the business is, without a set of Financial Statement the business would not be able to survive for long.

 

In this Learning Series, I will show you how to read Financial Statements, and more importantly how to make massive Profit from it.

 

You will learn how to identify Red Flags from Financial statements that can provide you early signals with regards to the financial health of the company. With that you may exercise your own conclusion whether to take any further action.

 

Before you continue to read further, I would like you to promise yourself to be fully committed, be open & participate in all the activities and exercises that follow.

 

Are you ready to start this journey?

 

 

One

Financial Statements

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In this section, we will touch on the basics of Financial statements.

Financial statements present the profitability of business and the financial position of the company. All companies are required to prepare Financial statements.

For listed companies, the Financial statements would be audited by independent auditors as required by the listing rules.

The main component of Financial statements are

  1. Balance sheet (Statement of Financial Position)
  2. Income statement (Statement of Comprehensive Income)
  3. Cash flow statement (Statement of Cash Flow)

We would discuss each of these statements in detail in later part of the series.

Financial statements can be found in the Annual report. It is usually located somewhere after one-third of the Annual Report and Independent Auditor would provide their opinion on the Financial statements.

 

Important note:

It is crucial to look at Auditor’s Opinion of the Financial statements before reading further as Auditors would normally raise concerns if there are any abnormalities with the Financial Statements.

In normal circumstances you will see the following:

“In our opinion the consolidated financial statements of the Group are properly drawn up in accordance with the provisions of the Act and Financial Reporting Standards so as to give a true and fair view.”

If there are any serious concerns, Auditor would place a “Disclaimer” or “Adverse” Opinion that that is where you must be extremely cautious when investing in such companies.

 

 

 

 

Two

Balance sheet

(Statement of Financial Position)

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The Balance sheet is often termed as Snapshot of Health.

It shows you how much a company owns (Assets), and how much it owes (Liabilities). The difference between what it owns and what it owes is its Equity, also commonly called “net assets” or “shareholders equity”.

Equity = Total Assets – Total Liabilities

 

Balance sheet tells you whether the company can pay its bills on time, its financial flexibility to acquire capital and its ability to distribute cash in the form of dividends to the company’s owners.

Example: Money in your bank is your assets and your credit card bill is your liability. By looking at your bank statement vs credit card bill, you will know if you have enough money to pay your bills on time or not.

Investors often overlooked the balance sheet.

While Assets and Liabilities aren’t nearly as interesting as revenue and earnings, it tells a lot on the Fundamentals of the company.

Next we will share with you some quick Red Flag Pointers to lookout for when looking at the Balance Sheet. These pointers will be discussed more in-depth in the later Section.

 

 

Stay tune for further updates! (I would be motivated to share more once the number of “like” is reached :))