Asia Value Investor

A business is only worth the profit that it will generate for its owners from now until doomsday, discounted back to the present, adjusted for inflation. As the “report card” of those earnings, income statement will help determining the price you should be willing to pay for a business.

Income statement, also called profit and loss statement (P&L), is a company’s financial statement that indicates how the revenue (Often called the “top line” , which is money received from the sale of products and services before expenses are taken out) is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the “bottom line”).

Income statement represents a period of time, usually one quarter of a fiscal year and the entire fiscal year. This contrasts the balance sheet, which represents a single moment in time. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.
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A balance sheet is a summary of a person’s or organization’s balances. Along with the income and cash flow statements, balance sheet is an important tool for investors to gain insight into a company and its operations.

In balance sheet, assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. It is important to note that a balance sheet is a snapshot of a company’s financial condition at a single point in time. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

A company balance sheet has three parts: assets, liabilities and shareholders’ equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth of the company and according to the accounting equation, net worth must equal assets minus liabilities. [Read the rest of this entry...]

Revenue does not come in at the same time as costs have to go out. This is the main problem facing by most of business companies and the whole point about cash flow. Proper management of cash flow is important in the smooth running, survival and success of a business.

The statement of cash flow is one of the four main financial statements of a company. Cash flow is the balance of the amounts of cash coming into a business and paid by a business during a defined period of time.

The statement of cash flow breaks the sources of cash generation into three sections: operational cash flow, investment cash flow, and financing cash flow.

Operational Cash Flow (OCF) or working capital is the cash received or expended as a result of the company’s core business activities. It comes from sales of the product or service of your business, and because it is generated internally, it is under your control.

Investment Cash Flow is cash received or expended through capital expenditure, investments or acquisitions. This includes investments in plant and equipment or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash outside of normal operations.
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Gross margin is one of several profit margin measures. It is the amount of contribution to the business after paying for the costs that it incurs for producing its products and/or services.

Basically,

Gross Margin = (Revenue – Cost of Goods Sold)/Revenue

Cost of goods sold includes variable and fixed costs directly linked to the product, such as material and labor. It does not include indirect fixed costs like office expenses, rent, administrative costs, utilities and etc.

For example, if a product costs your company $100 to make and if revenue is $150, then

Gross Margin = ($150 – $100)/$150 = 33%

Gross margin is a good indication of how profitable a company is at the most fundamental level. Basically, higher gross margins for a manufacturer reflect greater efficiency in turning raw materials into income.
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Basically the stock market tends to decline on news of rate increases.

When a country raises the interest rate for its currency, we would expect that currency to gain in value relative to other currencies. This is because an increase in a currency’s interest rate makes it more valuable to hold as an investment, due to the higher rates that banks pay on deposits, borrowers pay on bonds/loans, etc. When the currency becomes more valuable, demand for it should increase, and so its value (price) should go up.

Most of the business investments are funded wholly or partially by credit. As a result, it becomes more expensive for businesses to lend money as they will have to pay back more money. A company has to work harder in a high interest environment to generate higher returns. In general, businesses tend to invest less when interest rates increase, because the cost of borrowing money increases.
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The Price Earnings Ratio (PER) is a measure uses in valuing both the stock market as a whole and individual stocks.

PER is calculated as the ratio of a company’s share price to its earnings per-share. The value is the same whether the calculation is done for the whole company or on a per-share basis.

PER = Price/Earnings

For example, the PER of company A with a share price of $20 and earnings per share of $2 is 10. The higher the PER, the more the market is willing to pay for each dollar of annual earnings.

The PER does not work very well as a timing device, but it can give you some idea of the whether the market is “cheap” or “expensive”. Normally companies expected to grow and have higher earnings in the future should have a higher PER than companies in decline.
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Earnings per Share allows us to compare different companies’ power to make money. It is the portion of a company’s profit allocated to each outstanding share of common stock. A positive trend of EPS shows that the company is finding more ways to make more money.

Earnings per Share can be calculated by subtracting the dividends on preferred stock from net income, and dividing the result by the outstanding shares. This gives you a number you can use to compare the earnings of companies since it is unlikely any two companies will have the same number of shares outstanding. The higher the earnings per share with all else equal, the higher each share should be worth.

EPS = Net Earnings / Outstanding Shares

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Outstanding shares is used to calculate many metrics, including market capitalization and earnings per share (EPS). A corporation’s market capitalization is figured by multiplying its outstanding shares by the market price of one share.

Shares that is held by the public and can be freely bought and sold by public investors are called the float, and this value changes depending on if the company wishes to repurchase shares from the market or sell out more of its authorized shares within its treasury.

Outstanding shares refer to the number of stocks that a company actually has issued.
Stock currently held by investors, including restricted shares owned by the company’s officers and insiders, as well as those held by the public. This number represents all the shares that can be bought and sold by the public as well as all the restricted shares that require special permission before being transacted. They have voting rights and represent ownership in the corporation by the person or institution that holds the shares.
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A stock or share is not a symbol on a computer screen or newspaper. Stock is ownership in a company. This means that a private company decided to allow the public to be part owners of the firm and sold shares of ownership through a stock offering. If a company has one million shares of outstanding stock, then owning one share means that you own one-millionth of that company. When you buy a stock, you are paying for a small percentage of everything that the company owns, buildings, chairs, computers, etc. Also in this case, you will own a slice of every dollar of profit generated in the business.

Being a shareholder of a public company does not mean you have a say in the operation of company. Each stock you own has a little bit of voting power, so the more stocks you have, the more decision making power you have. Any person or institution that owns over a majority of the stock is called the “controlling shareholder”. Essentially, this person can do anything they want in a company – right down to firing the CEO.
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Warrent Buffett is the person I admire and respect. Not only he is my learning model in investment, but also my learning model for charity work. He donated billions of dollars to the charity so far!

In case you never heard about Warrent Buffett, following is an article that is related to this richest man in the world. Hope that you enjoy it!

Learning From Warren Buffet

Investing in stock and shares is no more a game of gambling as it was considered some time ago. Instead it is a game of taking mathematically calculated and correct moves to grow rich beyond one’s dreams.

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