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Analyzing periodic financials (2)

As a follow–up to the Growth in Turnover/Sales/Gross Earnings, one must equally consider the Earnings Growth. As a matter of fact, while the company’s level of activities is discernable in Turnover growth, its efficiency can be revealed in its earnings growth. Comparing the percentage growth in Turnover to the percentage growth in earnings shows how well cost has been managed or controlled in the periods compared. Cost control is crucial to profitability because it remains the only factor that can be controlled by the management of the company. Sales may be affected by recession or temporary unfavorable market conditions. Hence, reaching the optimal earnings for an increase in Turnover/Gross Earnings is a sign that the company’s board and management are on top of things.

Another very useful tip is to take a look at the dividend. Dividend is usually paid out of earnings, and the dividend payout ratio (dividend per share/earning per share) tells how much of the company’s earnings are retained for re-investment. It must be noted that the dividend policy of companies vary with the peculiarities in their industries. But then, a company paying above 75 per cent of its earnings may signal a warning, which could mean that the company may not be retaining enough for re-investment – talk about the long term vision of the company. Some players have also held that a high pay-out ratio may mean that the company’s earnings may be declining, or that the company is trying to entice investors. By and large, these figures must be interpreted with other qualitative factors taken into consideration as inferences would make more sense that way.

Analyzing periodic financials (1)
Posted: 17 Jan 2009 06:17 PM PST
Fundamental Analysis remains a vital tool in making investment decisions that are meant to stand the test of time – all other things being equal. The truth of this cannot be over–emphasized, particularly for that investor who has his eyes on the benefits that may accrue on his investment on the long run. For avoidance of doubt, Fundamental Analysis, according to the Financial Market Glossary authored by Mr. Remi Bakare, refers to “a method of securities analysis that tries to evaluate the intrinsic value of a particular stock…” which involves “…a study of the overall economy, industry condition(external factors), financial condition and management(internal factors) of a particular company”.

While this type of analysis would require expert appraisal in majority of its ramifications, the purpose of this piece is to educate investors on some basic comparisons (drawing from the internal factors, while holding external factors constant) that could be made to establish a basis for investing in a company’s future as it were. Some of the ways to derive data for the methods/techniques to be discussed later is through the annual report of the company. Better still, the published financials which could include the Income Statement and the Balance Sheet is helpful.

One of the things to look out for is the growth in the company’s Sales/Turnover or Gross Earnings as the case may be. It is important to consider this parameter because it is a portion of the Sales/Turnover that translates into the Net Profit or Income also known as the bottom line. An increasing turnover provides a higher probability for increased earnings. A decline may largely signify ineffective strategies, declining quality of company’s product or services, etc. As a matter of fact, it shows that the comparative level of activities between the past and current period have not been justified by the passage of time, experience and additional funds re-ploughed in terms of retained earnings. Analysts have recommended that an investor should not just seek growth, but have a benchmark of at least 10 per cent, from most recent historic figures, either quarterly or annually.

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