b) Consolidated income statement, balance sheet, changes in equity and cashflow statements.
The word “consolidated” means that the Group (集团) consolidates all its subsidiaries financial statements. The next thing to do is to determine whether the Group is worth an investment. I will not go through how to read and use the financial data here because to do that, you need to know how to conduct ratio analysis. Fortunately for you, a copy of the ratio is in my archive. You have to read and practice those ratios. But I’ll just show you the more common and important figures and ratios that I always use. The following analysis was done on Breadtalk peviously.
The word “consolidated” means that the Group (集团) consolidates all its subsidiaries financial statements. The next thing to do is to determine whether the Group is worth an investment. I will not go through how to read and use the financial data here because to do that, you need to know how to conduct ratio analysis. Fortunately for you, a copy of the ratio is in my archive. You have to read and practice those ratios. But I’ll just show you the more common and important figures and ratios that I always use. The following analysis was done on Breadtalk peviously.
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Do take note that for earnings per share, you can get the figure right below the consolidated income statement. For accumulated profit or reserve, you need to refer to the consolidated statement of changes in equity. You must also study the cashflow statement to see how much cash the company generates from its operations. Cash is the most reliable figure because it is extremely difficult to manipulate cash figure and escape the eyes of the auditors. Also, “cash = king”. After the analysis, and you are still interested in the company, then you shall continue your study.
c) Notes to financial statements
Skip all these except the segment information. These are all about accounting issues which you may not survive especially if you are not in accounting field. You should keep flipping the pages and before the end this session, you will find segment information. You need that. The Group will report their revenue and profit in terms of geographical segment and individual product/service. This will give you a good understanding of the growth of each product/service and of different geographical location. This will helps you a lot together with your knowledge in general economic and industrial development.
d) Statistics of shareholdings
Here you can get the number of shares issued. This is needed in your ratio analysis. Also, you can see who has the highest shareholding on the company.
e) Notice of AGM and Proxy Form
Here you will know whether the Board recommends dividends. If the Board so recommended dividend payout, it will be in the agenda. Throw away the proxy form as small fish like us couldn’t be bothered.
f) Chairman and/or CEO’s Statement
I see you are shocked. The big bosses statements are the last to read. Yes, and you have to read it with a pinch of salt. This is because nobody will or wants to reveal bad news to the public. Make sense? Even if there is, by human nature, you will want to tone it down. Therefore, it is pointless to read these reports at the beginning. The objective of reading it now is to have better understanding on the top management:
- Work and achievement so far.
- Future plan. Take note on all negative reports such as rising material prices, intense competition, price erosion etc.
Anyway, even if you skip this whole session, there is no harm.
g) Corporate Governance Report
This report is required by the Council on Corporate Disclosure and Governance and is mandatory to all listed companies. By “corporate governance”, we are talking about a company making decision in the best interest of its stakeholders. The Code aims to promote transparency. There are lots of information provided in this session includes top management’s pay (in band, not in absolute value), composition of their remuneration package etc. Again, as a small investor, you may skip whole part of it except that you should take note of the employees’ share options scheme, if any.
Personally, I always take note of a company share options scheme. Under normal circumstances, it usually does not affect my investment decision. In fact, sometime, it becomes an added motivation for me to invest in that company. What is an employees share options scheme (ESOS)? The ESOS serves to reward employees for improving company’s bottomline. It is a scheme that gives the employees (usually applies to people of management position) an option to buy the companies shares at the exercise price a year later but before the expiry date. The exercise price is usually, and should be, higher than prevailing market share price. The logic is simple. If the employees work hard and generate profits which add to shareholders value, the share price will rise above the exercise price. And the employees shall reward himself by exercising the option (buy the shares from the company) and sell it in the open market for a profit.
This should be the way ESOS is used under normal circumstances. But sometime, some company do it differently such as PSC (refer to my archive article on PSC) which in that case, I dump its share. ESOS can also be an incentive for me to buy the company’s share although it should not be the primary reason. For example, GP Industry has been generating high revenue and profit for years. It is quite a conglomerate with a few really big subsidiaries, a few of them used to be listed. The only problem is that the Group is dragged by GP Batteries although they are still earning a profit. Among other things, one of the motivations for me to invest long-term in GP Industries was because its ESOSs are much higher than current market price. This gives me a comfort that unless the management work hard to produce higher profit, none of them will never get a chance to exercise the options. So, I bought the share at a price lower than the options ESOS price. Heehee!
Again, I repeat, this factor is only a motivation, it alone cannot be use to make investment decision.
Conclusion
So that’s it. I have given you that few hundred buck for free; free only before the traffic in my blog exploded. We have gone through the annual report but only on those that are critical to your investment analysis. Any other things, you can throw it away. My advice is that as a beginner, you should take it one step at a time. Learn how to use the ratio analysis first. This is the most important skill that you must acquire. But again, financial report alone is insufficient to make an investment decision. It only gives you the quantitative factors. Do not forget about qualitative factors such as brand (e.g. MacDonald), location (e.g. prime land), industrial growth (oil exploration), global economy (e.g. US recession) etc.
c) Notes to financial statements
Skip all these except the segment information. These are all about accounting issues which you may not survive especially if you are not in accounting field. You should keep flipping the pages and before the end this session, you will find segment information. You need that. The Group will report their revenue and profit in terms of geographical segment and individual product/service. This will give you a good understanding of the growth of each product/service and of different geographical location. This will helps you a lot together with your knowledge in general economic and industrial development.
d) Statistics of shareholdings
Here you can get the number of shares issued. This is needed in your ratio analysis. Also, you can see who has the highest shareholding on the company.
e) Notice of AGM and Proxy Form
Here you will know whether the Board recommends dividends. If the Board so recommended dividend payout, it will be in the agenda. Throw away the proxy form as small fish like us couldn’t be bothered.
f) Chairman and/or CEO’s Statement
I see you are shocked. The big bosses statements are the last to read. Yes, and you have to read it with a pinch of salt. This is because nobody will or wants to reveal bad news to the public. Make sense? Even if there is, by human nature, you will want to tone it down. Therefore, it is pointless to read these reports at the beginning. The objective of reading it now is to have better understanding on the top management:
- Work and achievement so far.
- Future plan. Take note on all negative reports such as rising material prices, intense competition, price erosion etc.
Anyway, even if you skip this whole session, there is no harm.
g) Corporate Governance Report
This report is required by the Council on Corporate Disclosure and Governance and is mandatory to all listed companies. By “corporate governance”, we are talking about a company making decision in the best interest of its stakeholders. The Code aims to promote transparency. There are lots of information provided in this session includes top management’s pay (in band, not in absolute value), composition of their remuneration package etc. Again, as a small investor, you may skip whole part of it except that you should take note of the employees’ share options scheme, if any.
Personally, I always take note of a company share options scheme. Under normal circumstances, it usually does not affect my investment decision. In fact, sometime, it becomes an added motivation for me to invest in that company. What is an employees share options scheme (ESOS)? The ESOS serves to reward employees for improving company’s bottomline. It is a scheme that gives the employees (usually applies to people of management position) an option to buy the companies shares at the exercise price a year later but before the expiry date. The exercise price is usually, and should be, higher than prevailing market share price. The logic is simple. If the employees work hard and generate profits which add to shareholders value, the share price will rise above the exercise price. And the employees shall reward himself by exercising the option (buy the shares from the company) and sell it in the open market for a profit.
This should be the way ESOS is used under normal circumstances. But sometime, some company do it differently such as PSC (refer to my archive article on PSC) which in that case, I dump its share. ESOS can also be an incentive for me to buy the company’s share although it should not be the primary reason. For example, GP Industry has been generating high revenue and profit for years. It is quite a conglomerate with a few really big subsidiaries, a few of them used to be listed. The only problem is that the Group is dragged by GP Batteries although they are still earning a profit. Among other things, one of the motivations for me to invest long-term in GP Industries was because its ESOSs are much higher than current market price. This gives me a comfort that unless the management work hard to produce higher profit, none of them will never get a chance to exercise the options. So, I bought the share at a price lower than the options ESOS price. Heehee!
Again, I repeat, this factor is only a motivation, it alone cannot be use to make investment decision.
Conclusion
So that’s it. I have given you that few hundred buck for free; free only before the traffic in my blog exploded. We have gone through the annual report but only on those that are critical to your investment analysis. Any other things, you can throw it away. My advice is that as a beginner, you should take it one step at a time. Learn how to use the ratio analysis first. This is the most important skill that you must acquire. But again, financial report alone is insufficient to make an investment decision. It only gives you the quantitative factors. Do not forget about qualitative factors such as brand (e.g. MacDonald), location (e.g. prime land), industrial growth (oil exploration), global economy (e.g. US recession) etc.
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