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QuestionsCategory: Stock ScreeningToo many terms in Financials to look at in Annual report in a Stock
redvolver asked 3 years ago

I am wondering if there are only a few values that we need to look at in terms of financials for a potential business we are considering for investment.
My point is, there are many ratios and values that we can consider eg increasing EPS, growing revenue, ROA , Debt to Cash flow Ratio, PE, PB, and many other ratios.
Do we have to look through every single one of them and make sure they are satisfied? 
From what I have learnt, I will focus on business and management first, then financial will usually be good. But even so, coming to financial quadrant, there are so many values to consider and it is tough to make sense naturally to us who does not do accounting or related specialization.
So, are there only a few values that we need to look at to determine if the financial are good? or simply only a few values that are important to make sure that we are looking at a good and sound business model?

Jieren Zheng replied 3 years ago

Just sharing my thoughts, there are many companies who sell dreams or like to hype themselves.

Even a business idea is solid with seemingly good management, doesn’t mean it is good.

The numbers tell us a more realistic story on what is going on behind. That includes debt too. A simple analogy would be a seemingly well to do friend who is in a higher level position in a good company/industry. You see him with a beautiful home, car etc.
Yet underneath, is crippling amounts of debt.

Or from your own perspective (or at least mine), I do track and measure my own metrics, increasing income and the rate of increase, increasing profits from work (savings), net assets, amount of debt and how much debt compared to my net worth.

We want to look at numbers to confirm that what we are seeing make sense.

Another reason is to value them, a good company is a terrible investment at a wonderful price. A fair company could be a good investment at terrible prices.

It does take work to dip your toes into financial analysis, but once you get the idea behind it and over time with some experience, it starts to feel more natural.

I am not accountant trained by the way, I come from a biology background :)

Victor Chng replied 3 years ago

Thanks JR

redvolver replied 3 years ago

Thanks Jieren. It is quite taunting for beginners like me to see all these ratios. But u are right. I will definitely need more exposure to do up my analysis and all these will come more naturally with more exposure. :)

Jieren Zheng replied 3 years ago

Welcome both :)

1 Answers
Victor Chng answered 3 years ago

Hi Redvolver,
You are right that we should focus on business and management more than financial numbers. 
As what Jieren had mentioned “The numbers tell us a more realistic story on what is going on behind”
As much as we want to focus a lot on business and management, we still need to numbers to justify whether the management telling the truth.
You don;t have to look at every numbers, just have to focus on the important one such as:
Revenue growth, Net profit growth, Gross Profit Margin, Net Profit Margin, Debt Level (how are they managing it), Cash Conversion Cycle, Cash Flow, Cash Level, ROE, ROA, Quality of Income

redvolver replied 3 years ago

Thanks Victor!

But can I say that the important ones u mention are not the only ones fifth person only focus on when doing analysis?

Or the important values as mentioned are really what matters and the rest of values can be ignored for all stocks? Or it depends based on scenarios?

Just want to be clear :)

Victor Chng replied 3 years ago

I think those ratio can covered almost 80% of the stuff just that there are some scenarios that maybe need other ratios. Case by case basis as there is not 100% fool proof for it.

redvolver replied 3 years ago

Understand. Thanks once again :)

Victor Chng replied 3 years ago

Welcome :)