LEARNING SERIES: PROFIT FROM RED FLAGS – #2

Thanks for all the likes in Facebook! As promised, below is the continuation of the earlier article.

Link for the earlier post: https://www.investwhizz.com/2018/07/14/learning-series-profit-from-red-flags-1/

 

Below is one of the “secrets” that I have been using to assess the “Health” of the company’s Balance sheet. In order for all of us to excel together, do continue to ask question/debate on the points where everyone would be able to benefit and learn and grow together as a community!

 

Balance Sheet checklist:

  Rating Red Flag Pointers
ASSETS
Current assets
Cash and cash equivalents Cash is NOT with Parent Company
Trade receivables Receivable days > 180 days
Inventories Inventories days way above Industry average
Other receivables Huge amount of related party receivables
Derivatives High Risk Products
Other current assets
 
Non-current assets
Property, plant, and equipment Unusual Long useful Life
Investment Properties Aggressive Valuations

 

Goodwill Goodwill (>25% of Assets)
Other intangible assets
Total assets
Checkbox Red Flag Pointers
LIABILITIES AND EQUITY
Current liabilities
Trade payables Little or no payables
Short-term borrowings Excessive amount > Current Assets
Current portion of long-term borrowings Excessive amount > Non-Current Assets
Current tax payable 0 Tax vs High prior year profits
Accrued expenses
Total current liabilities
Non-current liabilities
Long-term debt Excessive amount – check ability to pay Interest
Deferred taxes
Total non-current liabilities
Total liabilities
 
Shareholders’ Equity
Share Capital Large number of Rights Issues
Other Reserves Large % of Equity > 50%
Retained earnings/(Losses) Inconsistent earnings
Total equity

 

In addition to what was shown, there are also Items that are not in the Balance Sheet where accountants called it “Off Balance sheet items”.

Examples of such items are: Committed Operating Lease (e.g. monthly rental of photocopying machine etc), Pending Litigations (Lawsuit due to products, infringement of copyright etc).

These are important as it would affect the company’s profitability should company decide to change their operating lease or when the litigations becomes payable.

 

 

 

Three

Income Statement

(Statement of

Comprehensive Income)

_________

 

The income statement presents the financial results of a business for a stated period of time. Investors normally discuss about this during company’s results announcement. Income statement shows how much money the company generated (revenue), how much it spent (expenses) and the difference between the two (Net profit) over a stated period of time.

 

Net Profit = Total Revenue – Total Expenses

 

 

Increasing revenue offers the first sign of strong fundamentals. Rising margins indicate increasing efficiency and profitability. However, you cannot rely just on these factors to make your decision

It’s also important determine whether the company is performing in line with industry peers and competitors.

Likewise, we will share with you some quick Red Flag Pointers to lookout for when looking at the Income Statement.

 

Do stay tune for further updates on the checklist for Income statement!

(P.s. I would be motivated to share more once the number of “like” is reached :). Do share the post if you think it can benefit people around you!

Targeted likes: 100!