Financial Reports
Hi Guys When reading, financial reports of companies, what are the most important aspects, of the report, to take into considerations cheers Paul M
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Answer
Hi Paul,
The long answer is focus on revenue and earnings trends, cash flow generation, balance sheet strength, margins and management outlook. Investors should look for consistent growth in sales and profits, strong operating and free cash flow, and a sound balance sheet with manageable debt and adequate liquidity. It’s also important to monitor margins and returns to gauge operational efficiency, plus of course, reviewing management commentary and tracking this against performance. i.e. we like to look at past guidance/rhetoric from management in the context of what they actually delivered.
If this all seems a bit much, if we had to highlight a ‘short cut’, look at earnings trends over time and then the PE multiple the stock is priced on now, relative to that earnings profile, and importantly, relative to the companies historical PE i.e. is it cheap or expensive relative to it’s own history, and then question why that might be the case.
It’s also important to note that how the market reacts to a particular earnings update very much depends on a case-by-case basis, for example a growth company trading on a high value multiple must demonstrate that it is indeed growing. Conversely with a miner, its production and cost of this output often determine how markets react to the numbers whereas with the banks the net interest margin (NIM) is closely followed.
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JB Hi-Fi (JBH) historical PE multiple – source Bloomberg
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JB Hi-Fi (JBH) historical PE multiple – source Bloomberg
