EVALUATING the past performance of companies in which we have an investment is a daunting task. Decisions often are based on hunches, the advice of stockbrokers, and the media. Sometimes a herd mentality drives investment decisions.
But while stockbrokers may be armed with the knowledge and tools, investors can take owner-ship of their own portfolio by using some simple techniques. Using ratios also can be a useful tool to assess the earning capacity and the financial stability of a company and the return on investment for the shareholder.
According to Australian Securi-ties and Investments Commission chief accountant Ian Mackintosh, an investor should start by studying the profit and loss statement to see if the company made a profit, compare it with last year and see what caused those changes. Mr Mackintosh points out in the latest issue of the Australian Shareholders’ Asso-ciation newsletter, Equity, that the investor then should see what the dividends are going to be and compare it with the net profit. If the value of the total dividend payout is nearly all or more than profits, it may mean a good return on the investment for the short-term, but long-term it could mean lower growth potential.
The investor should look at cash flows from operating activities, how money is being spent and the source of the funds being spent by the company. The company may be borrowing money or have raised extra funds from share-holders during the year.
An analyse of the balance sheet will highlight how strongly pos-itioned the company is.
“Check the company’s assets for large amounts of ‘intangibles’, such as brands, licences, or newspaper mastheads,” Mr Mackintosh said.
“Its very difficult to value intangible assets accurately, and changing economic conditions can sometimes slash the value of even blue chip brand names.
“If tangibles make up more than half the company’s total assets, it can make the company a riskier investment for shareholders.”
