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Kim Eng Seminar notes Four key reports we want to understand Financial statement P & L Balance sheet: how

much is earned Revenue: amt made in a year Profit and Loss statementsstatement of comprehensive income. Operating profit, operating income, profit after cost Total nett profit, earning before interest tax (income) depreciation and ammotisation Difference: interest: financing interest, tax: paid to IRAS; Depreciation: asset used, counted as expense eg. 1 laptop 3k, to be used for 3 years therefore every year counted as 1k expense. Ask yourself: are company A and B exposed to the same amount of interest and loan term, taxation law? are they exposed to the same amt of depreciation? Trainer says EBITOA is excess since they try to add back what they have, but all companies in the same industry would have similar costs and business costs. Use nett profit to see only, not EBITOA because its the same, subjected to the same interest and laws. There are analysts reprts that use it, good to understand why they use the same thing. Financial statement: pure business profits (business arm), total nett profitsee everything Profitability ratio Some track annually asnd some like to track quarterly earnings, analyst prefers yearly (4 full quarters) What is non-controlling interest? If a holding company like Singtel, holds 80% subsidary, if it reports earnings, then 20% NCI non-controlling interest See total nett profit, whether it holds or underlies Cash flow statements Important to check the health of company If company reports high earnings, it shd be matched with company operating cashflow. 3 categories: operating financing and investing. Operationg must be +ve, eg shengsiong if its selling groceries, then having ve operating would mean that its unable to sell whatevers on its shelves, or cannot pay suppliers What causes a company investing to be negative? Not necessarily a bad thing. Check whether they change their cash holdings into shares they buy. Buy shares lose money, or sth else

Financing positive= company borrowed money, eg. from bank, or from shareholderrights issue What is rights issue? Every 1 lot of share you own you get to subscribe a new amt of shares at a lower price. More shares for more money for current shareholders. Operating must be positive. Quarterly statements can be negative, you can go to the final bow line and get nett cash, nett ocf, nett investing nett financing Investing negative means changing into shares, or could have lost money check the fine lines. Financing positive means I borrowed loan or issued shares, negative means return or paid out my loans. Shareholder equity changes: Why impt? Shows how much the company has rinvested or retained its past profits till today, how muchnew shares has the company issued this year, how much dividend did the company issue this year. Look at it as a pie. A company can choose not to issue divid, the whole pie will go into retained earnings /reserved for year 1 or yr 2 SHAREHOLDERS EQUITY ROE (blue) ROE(blue) RIGHTS ISSUE (red) ISSUED CAPITAL (red) More blue- better Top staff: Option to exercise and able to buy stock at a lower price, sometimes company will have treasury shares As a shareholder: share capital, total earnings, return equity Dividend payout to shareholder, nett full pie, dividend is taken out. The nett pie goes into the blue ROE. Singtel: the share capital was 2.6 billion, retained earnings 23 trillion. If the company is est for a long time, the ratio can go as high as 1:10. Genting: first year, doesn't have earnings but has accumulated loss. Whatever genting has issued, they don't have a blue, they have a minus-ed down. This means whatever money they get is being used to build, whatever. YZJ: treasury, fair value hedging, reserves, translation reservesall parked under others because its a China company.

What you look for: did the company add value for me? rather than starting one yourself, you will want to buy into a company for the sake of it adding more for you. so you will be interested in retained earnings. Financial reports: go to SGX.com, company disclosure, annual financial reports. If not you can go to investor relations website of your company. One thing to highlight: watchlist, SGX has a watchlist that has companies which are in trouble, DO NOT BUY THEM Third party website: listedcompany.com, no .sg, what it does is that it is an investor relations management company so they help them manage the wbesites for a fee, like a service. Not all companies there are listed in SGX, its a third party website. If you have a few companies in your portfolio, good to go to their IR page and sign up or their newsletter for those that actually have, so if they issue rights issue you get an email straight away. Financial report sample: Breadtalk: a report itself, the first 30 pages are the most important, fincnaicl figures are historical, summary of what has happened. The outlook of the company can be understood better by the CEO of the company. Whatever he thinks of the company and where hes going to bring the company forward is whats going to affect the earnings in the future. Key highlights, intangible assets, non-current assets, sometimes they calculate the ratio for you. Financial ratio analysis: check whether company is healthy or not; directors must present during AGM Financial ratio analysis: Size is different, company is different. See per dollar of resources they have, how much can they make. How effective are they in using $1 of assets in how much money they earn. Performance of company vs. competitors, are there any red flags that indicate embezzlement or challenges? Challenges to the continuation of business eg. depreciating earnings and continuing debt? Eg. Nokiaevery product launch, they still refuse to switch to android and apple. Whatever industry youre interested in, follow the report for those things. When there is a technical recession, the better ones will recover better. Good earnings do not equate to increase in price, but bad earnings definitely a drop. What causes the downfall of a company? Debts and no income. Debt risk: 2 key ratiosone which has to be used together with profitability ratio, debt-equity ratio. Calculated by total liability on balance sheet divide by shareholder equity. Some people use this only but unreliable, high DE ratio doesn't mean its going into debt. Just means that it employs a different liability over equity ratio, company management choice, neither good or bad, bad in that it is possible that it cant pay. Diff industries have diff equity ratio.

Choose more debt, less funding possibly to finance more money. Eg. Salesmen 1 man doesn't take debt and has less cost but takes bus, meet 5 clients. The other guy uses a car, can meet 10 clients and can possibly earn more. Debt equity ratio is choice of management, whether good or bad compare across 3-5 years, returns must also go up. If it doesn't go up theres also sth wrong. Compare with profitability ratio, don't take it singly. Current ratio has to be >1: current asset divide by current liability. Current asset: whatever funds available. Current liability: whatever we have to pay. Shows whether company is solvent or not. Asset: inventories they have, liabilities whatever they have to pay out. Some acid ratio thing that excludes assets or sth (check) Ratio for earnings risk: Profitability: earnings per share= nett profit/no. of outstanding shares Preferred dividend minus from the pie. Higher EPS is better. Sharesimbcan see the number of shares issued Difference between bonus issue in shares and divid? When company issues bonus shares, what theyre essentiallly doing is just giving shares instead. Nett effect: company doesn't want money out, keeps it but keeps shareholders happy. Increases the red portion but keeps the blue portion the same. Same as I give u divid, then I issue u rights. Somewhat like rights issue. pocket-to-pocket, they give u more shares instead of giving you cash. Sharebuyback vs. retirement of sharesretirement of shares meaning lessening the no. of shares as a whole No fixed ratio about an earnings per share price. Take 3 top performing companies in sector and compare them with one another. Don't bother looking for 5 year old industry benchmark. Just compare companies n who is performing better. Divid yield: annual divi per share/stocks px per share Chunk per share in pie vs how much am I paying per stock. If ur not going for capital gain ur going for yield, then you will calculate this yourself. Industry figures provided on SGX (formula on website) shows dividend payout ratio instead of divid yield. Theirs is divid divide by earnings per share, but this is divid payout ratio formula. It just tells you that out of the whole pie, what %tage is given out as divid. Go to company disclosure, corporate action. Return on equity Net profit/shareholders equity (ROE) or net profit/total asset (ROA) ROE: eg. this is my house 800k, I rent it out at 2k a month, say I get nett income 20k/year. ROE basically says that I count my yield 20k over 200k = 10%. ROA 20k/800k = 2.5%

Reveals how much a company earns based on a shareholders capital. Both can be done together. Company with a lot of assets: ROA will be low, a company with high debt and little equity, means the ROA will be low. ROE: every $1 the shareholder put in, how much company earns ROA: every $1 asset company has (total, current n non-current, intangible) how much company earns DE goes up, ROE ROA goes up also. No normal ROA, just compare with others in the industry. Capital gain: earnings per share, every amt I put in, see how much it adds in Shareholder return: earnings per share, divid yield. ROE ROA: see how fast they churn profits, compare performance of diff companies. Prevents u from investing in a stock where CEO has lost his edge 1. compare ratio within same industry 2. compare across a few years to see growth pattern No need to compare in industry standard, which is just the 5 years divided. VALUATION OF SHARES How so I know the value of what im buying? Is it overpriced or underpriced? 1. use px earning ratio 2. net asset value per share Price earning ratio: market price per share/earnings per share. High pe ratio tells you market is willing to pay a lot more for every one box it created at the end of the year. Eg: OCBC earnings per share 0.674, so every year ocbc added for every year 60c that you own today. EPS: price 8.13. PE: 12.1 Therefore for every $1 the company earned per share, the mkt is wiling to pay 12x more to own that share. UOB: earnings per share: $1.728, brings in 1.72 a year per share Share price $17, so ratio 9.8 Therefore What does PE say? Only market expectation and market favouritism for that share. Says that market is willing to pay much more for OCBC, because this is the px mkt is willing to pay more, vs. the amt mkt is willing to pay for uob. You can also say that the PE ratio is low therefore better to rise.

But if you look at earnings per share, UOB is performing better than OCBC. ROE and ROA, comparing performance of company. Other which is more stingent: nett asset value or nett intangible asset value. This amt is whats called book value, divide by share as long as less than book price means undervalued. Asset minus away liability, take out intangible asset, money left is ur actual share value (actual worth a share ti you. NAV/No of shares. Share mkt price the share is currently underpriced by the market. Nett asset value: What it means: amt of money shareholders will receive if company liquidated. Eg capitaland: if it stops today, pay up all its debt, remaining $ give to the shareholders, shareholders will get $3. BUT land is generally overpriced. But depends, some banks have not revalued their assets so then its undervalued. Supposedly. Against the law if overreported, but underreported is not against the law. How do we know if the companies we are investing in might be privatised? Eg. CK Tang nobody knows, its not possible. Even people involved in negotiation deal will not know. For a company to decide to be delisted, it's majority shareholder vote. Overall 100%, special resolution 75% of total issued shares, minority shareholder usually owns less than that. You can take legal action if you feel they are underdeclaring and you want to charge them against this, it can be a civil case or criminal case. When the assets were last valued: under notes to financial statement. If you feel they have not gone and valued for a long time, raise it during AGM. Assumptions: applied on a growing company, expected to have increasing returns, assume that the money (cash flow or divid or NAV) can be used to discount back. This percentage you have to assume, you can get industry analysts assumptions, or the historical performance of a company. Discounted cash flow approach Assume a growth rate eg. 10%, then you discount it back eg I intend to hold it for a year, up to 2012, the amt of money I discount it back, then it will be a risk-free investment (SG: CPF), eg. 100,000, 10% growth, divide by 1.024, see the current company value therefore you get the value of today. Intrinsic value: either historical value, or its discounted cash flow approach. Means you project and you discount back. You find that this company I cant see historical, so you discount it back. Usually for a growing company. Look for opportunity cost for you. Instead of putting a certain amt in a share, you can put in CPF. That's all for today for financial ratio. Book value: how much its worth on book, asset value or nett tangfible asset./ calcuate one take our the other.