Wednesday, May 28, 2008

How I read a financial report

I promised someone i'll do tat hong. In fact, I did it very briefly and posted it in the cbox, but I think that person didn't see it. Either way, May asked me to help out on reading tat hong's financial report, so here I am.

First of all, I confess my accounting knowledge is lacking. As such, there are certain things that I might not know or understand. I try my best. This is what I'll look for:

1. Income statement

a. Calculate gross margin, net margin
b. Check to see if there's any big changes in margins
c. Check to see if there's any big changes in the expenses
d. Check out the earnings per share

2. Balance sheet

a. With reference to income statement too, I'll calculate the ROE and note changes between years/quarters
b. Calculate debt/equity, current ratio, quick ratio
c. Check if there's an increase in current and long term liabilities
d. Check to see if there's a big changes in inventories, trade acct receivables and cash equivalents

3. Cash flow statement

a. Check cash generated from operations
b. check cash flows from financing activities, does it make up the main bulk of cash and cash equivalents at end of the year
c. check cash flows from investing activities, specifically any big changes in individual components

4. Read footnotes, esp the parts about management's remarks on revenues, profits, margins etc.

5. Check dividends if any. Calculate payout ratio.

6. If i'm really into the company, i'll check to see their business results by geography, segments etc

Okay, with that, let's jump into tat hong's results, I'll not do any analysis. I'll just be stating the obvious:

1. Income statement

Gross margins = gross profit/revenue
Net margins = profit for the year/revenue
Earnings per share = Net earnings / outstanding share

* cookieguy mentioned that net margins should use profit attributable to equity holders of the company divided by revenue. I'll stick to what I put earlier.

Gross margin----39.0%-----------30.9%
Net margin------15.9%------------17.4%

- 2007 have this 44 million under operating income. I'll check it out to see what it is, as it inflated the net profit for the year 2007, that's why we see a drop in net margins for 2008 compared to 2007.
- big jump in operating expense in 2008 caught my eye
- if i use net margins as the net profit attributable to shareholders divided by revenue, i'll get a 2008 figure of 14.0% and a 2007 figure of 16.4%.

I got a little interested at this point to find out more about tat hong's results:

Gross margin----39.0%-----------30.9%--------28.9%-------26.8%
EPS (cents)------17.73-------------17.10---------9.66---------4.57

Looks interesting indeed.

2. Balance sheet

ROE = net profit for the year/total equity
Debt to equity = Total liabilities/ total equity
Current ratio = current assets/current liabilities
Quick ratio = (current assets - inventories) / current liabilities

*cookieguy mentioned that ROE should be profit attributable to equity holders/equity attributable to equity holders. But again, I'll just stick to my formula.

Current ratio----1.39---------------1.27

In my opinion, quick ratio isn't relevant here.

- ROE dropped from 07 to 08. Could be the other income in 2007 playing a part
- Debt to equity dropped from 07 to 08 - a good sign
- Current ratio also increased from the same period - good sign.
- Using the formula cookieguy mentioned, i'll end up with 2008's ROE of 24.1% and 2007's ROE of 31.0%.

Other ratios can be calculated, but I leave it to you to find out. In fact, you might want to come out with some yourself, made specifically to find out for a particular industry/sector.

I think that's about as far as I would like to go. Hope it helps :)


Mike Dirnt said...

* cookieguy mentioned that net margins should use profit attributable to equity holders of the company divided by revenue. I'll stick to what I put earlier.

i notice there is variation in definition for this calculation especially the ROE. but i think the formula you mentioned earlier is more appropriate.

but i think as long the basis of your calculation is the same when you do comparison, then should be ok

la papillion said...

Hi Mike,

I agree with you. As long as the comparison is the same, I don't think there's any problems.

There are many variations :) hoho, that's why I calculate my own ratios :)

Brendan said...

Tat Hong's growth rate is too low to create a catalyst for the share price, PE is not low enough.

la papillion said...

Hi brendan,

Actually I think Tat hong's growth is decent enough. PE at last close is around 12-13. Margins are very good (>15%) and ROE is around 20+%,which is quite good. Earnings had been growing for the past 3-4 years too.

Not excessive in debts too (i wouldn't know how good or bad their debts are, for its business. Must do comparison)

Not sure about their line of business though. I will do an analysis of Tiong woon if I'm interested in Tat hong, to see how they compare with each other. But I think i'll leave this alone for now :)