LEARNING SERIES: PROFIT FROM RED FLAGS – #3

Thanks for the messages and comments in Facebook! Below is part 3 of the Learning Series: Profit from Red Flags. In this part, we will complete the Income statement and Statement of Cash flow

Link for the earlier post:  https://www.investwhizz.com/2018/07/21/learning-series-profit-from-red-flags-2/

 

 

 

Income Statement checklist:

	Checkbox	Red Flag Pointers
Revenue		Abnormal fluctuations
Cost of Sales		Abnormal fluctuations
Gross Profit		Thin margins
Other income (Interest/Dividend/Non-operating income)		Exceptionally high one off item
Other operating expenses
Marketing and distribution
Research and Development		R&D a lot more than Sales
Administrative expenses		High restructuring
Finance costs
Other expenses		Goodwill/Expense written off
Profit before tax
Income tax expense
Profit for the year from continuing operations
Loss for the year from discontinued operations
PROFIT FOR THE YEAR
Attributable to:
Owners of the company		Only this belong to Shareholders
Non-controlling Interest		Large % vs Total Profit
Earnings per share:
Basic
Diluted

 

Other Comprehensive Income

Profit for the year
Other comprehensive income:
Exchange differences on translating foreign operations
Net fair value changes of available-for-sale financial assets
Net surplus on revaluation of freehold land/building
Other comprehensive income, net of tax
Attributable to:
Owners of the company
Non-controlling Interest

 

 

 

Four

Cash flow Statement

(Statement of Cash flow)

_________

 

The cash flow statement shows how much cash comes in and goes out of the company over the period or the year. Cash flow statement is different from income statement as it measures the real exchange of cash & cash equivalents and it is usually harder to manipulate.

Although cash flow statement is more complicated, many investors feel that it is the most transparent financial statements and tend to place more reliance on it.

 

Cash flow statement checklist:

Cash flows from operating activities	Checkbox	Red Flag Pointers
Net income
Adjustments for:
Depreciation and amortization
Provision for losses on accounts receivable
Gain on sale of facility
Increase in trade receivables
Decrease in inventories
Decrease in trade payables
Cash generated from operations		Negative operating cash flow
Cash flows from investing activities
Purchase of property, plant, and equipment		Huge purchases which are not sustainable
Proceeds from sale of equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of common stock		Too frequent raising of money
Proceeds from issuance of long-term debt		High gearing resulting in high interest
Dividends paid		Dividend > Operating cash flow
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

 

I have now completed the basic topics, we are now ready to get into a deeper level of understanding in the next post.

 

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Targeted likes: 150!