Well I finished my final exam for the semester today. Now I have...

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    Well I finished my final exam for the semester today. Now I have a week break to focus on trading before more exams....

    Thought I'd kick things off with the discussion topic two weeks ago regarding financial statements. It was a discussion that has been done before briefly but not in the depth it was two weeks ago. I was looking for something like that for ages but had no idea where to begin on the internet.

    I dont think that much value will be found anywhere else online. I honestly think we managed to cover every little aspect of what exactly to watch for in financial statesments, could easily be a winning formula who knows? I havent had time to put it to test yet but will do so in the future. I've made a quick summary by compiling and compressing everyones contribution into a document that can be added to the knowledge library whenever for future reference:

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    Financials for Companies

    EBIT VS EBITDA

    EBITDA can skew what the true earnings are as they do not include working capital costs and neglects capital expenditures.
    EDITDA basically cuts out depreciating liabilities and companies trade at a lower EBITDA multiple so this does not necessarily mean its cheap.
    What EBITDA does help is focus on pure operating cashflows rather than non-operating cashflows.

    Full details here: http://www.investopedia.com/articles/06/ebitda.asp

    Impairment/Goodwill
    Goodwill is recorded when a company makes an acquisition of a business or operational asset. Often a company will pay future value for a firm. Hence the difference between the purchase price and the present value is known as “Goodwill”.
    Goodwill = Purchase Price – Fair Value
    If for any unforeseen circumstances the acquired business underperforms, isn’t cashflow efficient an impairment charge is taken. This means the Fair value(Book Value) has dropped from what the company has expected.
    Impairment (Loss) = Book Value – Fair Value
    Fair Value = Undiscounted Future Cash Flows + Salvage Value
    Things to Scan For:
    • Scan for rough Assets Vs Liabilities, Cash Vs Debt. Contrast this to the 4C cashflows – in particular the operating cashflow and how much financing side is costing. This gives a rough idea if general cash balance is increasing or decreasing.
    • Scan through NPAT, EPS, Net Assets, Debt (Ensure Cashflow can repay this), Operating Cashflow (EBITDA)
    • Companies hold off paying invoices until June to improve cash balance. Scan the payables in the previous period – an increase of payables in the new period suggests a delay to invoicing.
    • Scan for Impairment Charges – New management take impairment charges (Decrease NPAT) on assets (blame on old management for overvaluing assets). Soon after the assets are increased in value by management (NPAT Increases) and new management looks great.
    • Ensure Cash burn is not standing out, or increasing rapidly between quarters. Look for Low burn, High Balance.
    • Check Employee costs are not sticking out. Simple rough formula
      Average Quarter cost = (Year to Date – Current Quarter)/3
      Check if the Current>Average significantly
    • Ensure to check Payables vs Receivables and make sure the Cash Balance/Cashflows can account for these factors
    • Accounting fees compared with sales should be around 1%
    • Compare Tax Paid with Profit Before Tax should be around 30%
    • Profit Vs Revenue. A company generating tonnes of revenue but no profit is due to fail
    • Some Performance Ratios : Expense (Expenses/Sales), Net Profit (NPAT/Sales), EBIT Margin (EBIT/Total Revenue)
    • Director Fees – Compare this to peer companies to ensure its not a “lifestyle” cost.
    • Scan the difference between reported revenue and cashflows. If revenue reported is significantly higher than actual cashflow then it may indicate bad debt issues, cross transactions, middlemans where there is a delay in collecting customer receipts. This can be checked in receivables. Differentiate between Cash Fees and Non-Cash Fees (Shares/Options)
    • Compare cashflow from customers(cash revenue) vs unearned revenue. Unearned revenue is where the cash has been collected but work has not been performed meaning the company will incur a cost of performing the works in the future. Make sure they have enough working capital to perform these works.
    • Accruals are a companies estimate of future uncertain revenue and needs to be closely inspected
    • Scan the entire Debt/Payables structure. Terms of debt, providers of debt, Convertible notes (often looked down upon), period to payback given current cashflows.
    • Cash burn rate ideally should be under $200k/quarter for small companies with few directors involved. Or if cash burn is too low $25-75k/quarter alarm bells should ring and warrants further investigation
 
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