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!
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