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How to read a firm like a book


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How to read a firm like a book Date : 3 March 2015How to read firm like a bookImportance of Financial Statements.

Top 10 items to note when reading financial statements

Financial StatementOffer key insights into companys financial well-being

Financial Statements provides investor with a scorecard of a companys financial health DBS group research analyst,2013

Top 10 items to note for reading Financial StatementProfit




Cash Flow Valuation Ratios



Changes to Senior Management

Auditors Report1. Profit


Sales and net profit as well as growth are probably the sexiest line that capture eyes when we first look into a companys financial statement (Ho,2013)

They should also look out for one-off items, such as sales of assets or a debt write-off, which could result in abnormal earnings (Hui, 2013)1.Profit2. Revenue

2.REVENUERevenue, also referred to as sales, is the total amount of money received by companies for goods sold or services provided

2.REVENUE (Cont.)"The ultimate long-term driver of growth for a company is its revenues, and hence this is the key item to focus on," said Mr Hartmut Issel, head of Asia-Pacific wealth management research at UBS.

2.REVENUE (Cont.)Investors may also look at the company's revenues by segment to identify the performance of various business units, said Ernst & Young assurance partner Yee Woon Yim. For example, companies that are involved in long-term contracts such as construction of buildings and ships tend to recognize revenue as and when the construction progresses," said PwC partner Kok Moi Lre

3. Dividenda. What is dividend?

3. Dividendb. Why do companies pay dividend?-Making belief-Good sign of a company-Nothing better to do with the money(, 2014)

3. Dividendc. How well are dividend covered?- Dividend payout ratio = Dividend per share/Earning per share- Dividend yield= Dividend per share/ Price per share(Scott, M, 2012)4. Debt


Two Important ratios

Interest coverage : a measure of a companys creditworthinessGearing ratio : the ratio between a companys borrowed funds and its assets/capital 5. Cash Flow

5.Cash Flow- The viral importance to the health of business.Net cash flow = cash inflow cash outflow +NCF : business is running smoothly -NCF : give some signalThe significant segment to watch is the cash flow from operating activities

6. Valuation Ratios

6. Valuation RatiosInvestors should consider two important ratios to measure a companys stock value.Price-to-earning (PE)High PE means investors are expecting sharper earnings growth in the future.Compare PE between same industry.Price-to-book value When price is less than book value, earning of company is very poor return on asset.Method for finding low-priced stock.7. Cost

7.CostsSale and marketing cost. Increasing competitionOperating costChange in industry trends

8. Outlook

8. OutlookFinancial Statements General indication of the company and industrys performanceA scorecard of a companys financial healthHistorical performance

9.Changes to Senior Management

9.Changes to Senior ManagementKey indicator of the healthy companyCorporate Governance

Changes to senior managementRegular resignation of key executivesFrequent change in the CFO10.Auditors Report

10.Auditor Report An essential of every financial statement

Warning signs

A change in auditors or an adverse opinion report from auditors could also be indications of troubles ahead Lee, 2013ReferenceThe Straits Times(2013) How to read a firm like a book. Available from : [Accessed 2 March 2015]

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