Have you ever looked at the news, or at a company’s results, and have had no idea what they mean or how to interpret it? You know there’s information lurking deep down in the results that you could use to profit from, but you’re never sure where to look. Or exactly what to look at!? And with reporting season around the corner, just imagine the profit opportunities you could uncover before any other investor if you knew how. That’s why I want to give you the reporting strategy that you could use to read financial results like a pro.

1. How to read financial result like a pro
17/September/2015

2. 6
4
8
10
12
Step 4: Discover the one figure that indicates the company’s performance
Step 1: How to decipher previous reporting results
Step 2: What can a company’s revenue tell you
Step 3: What a company’s profit margin will tell you
Step 5: Learn to read the commentary that reveals the company’s sentiment
How to read financial results like a stock market veteran

3. 3
16
14
19
22
24
Step 9: The autopilot money maker
Step 6: How to determine earnings consistency
Step 7: The two liabilities you need to watch out for
Step 8: The one figure you need to define your earnings potential
Step 10: How to decode company prospects
10 steps checklist to read financial results like a pro –cont.

4. Step 1: How to decipher previous
reporting results

5. Previous reporting results
• Has the company met their previous objectives / targets?
• You’ll find this information on the trading statement summary / Annual reports, or
the Chairman`s letter to shareholders
• This sets the scene for the results and also builds the credibility of management
when meeting previous expectations.
What is the take-away / action point? IE If the companies previous guidance
was met then you can be confident about the management `s ability to
meet expectations, previous strategies worked, gives credence to the
current results. Opposite is true.

6. Step 2: What can a company’s
revenue tell you

7. Is revenue beating inflation ?
• Revenue / sales are synonymous
• This basically tells you if the
company is growing or shrinking
• Strip out any distortions such as
asset disposal or acquisitions
• It gives you a sense of
operational efficiencies
• Where you’ll find this information:
trading statement, or the annual
report presentation
If the revenue beats inflation, it has a pricing power, ability to pass inflation to
customers therefore volumes would be up, market share increasing. if the
revenue doesn’t beat inflation, sales have dropped, price sensitivities, shrinking
market share.

8. Step 3: What a company’s profit
margin will tell you

9. Profit margins?
•Profit margin: The measure of profitability, it’s the percentage of selling price that
turned into profit.
•It’s a good indicator of a company`s pricing strategies and how well it controls costs
•Low margins indicates a decline in sales / increasing cost pressures, while Increasing
margins indicate increasing sales volumes, cost compression, robust operating
efficiencies
Profit margins also indicates a company`s pricing power (passing inflation) economies of
scale benefit, links to life stage cycle etc. If all things are moving in the right direction then
you’re looking at a sound operation.
•Differences in competitive strategy and product mix cause the profit margin to
vary among different companies
•Key point: invest in a growth company, that has the ability to increase its profit
margins because the share price growth usually follow earnings growth.

10. Step 4: Discover the one figure that
indicates the company’s performance

11. Headline earnings are a measurement of a company's
earnings based solely on operational and capital investment
activities. It specifically excludes any income that may relate
to staff reductions, sales of assets, or accounting write-
downs.
Look out for:
- A rising HEPS is better than a falling one.
- A share issue to fund growth will usually have a negative
impact on HEPS which is not always a negative.
- Essentially HEPS movements should be correlated to
profits
Headline earnings per share (HEPS)

12. Step 5: Learn to read the commentary
that reveals the company’s sentiment

13. • Read management commentary and to assess how they
feel about the results.
• Be always aware that the commentary will likely have
biases that show management did a great job.
• Key take away here is to see if management explicitly
highlights key risks to the profitability of the business,
“management should not hide negatives factors”
• Good and honest management will write about the
negatives as well as the positives in their commentary.
• Use your own judgement to determine is the commentary
is balanced, realistic and impartial.
• This commentary should help you see if management is
hiding anything which flags some risk to earnings.
Management commentary

14. Step 6: How to determine
earnings consistency

15. Consistency is the name of the game
•One-off events can seriously distort results
•You should try to identify as many as possible
•Do your own calculations to get a better sense of
consistency
•Consider unusual transactions, that management comment
on, as they might be unrepeatable business
•Sustainable earnings growth means consistent earnings
growth
•This will give you a true reflection of the company`s ability
to grow sustainable earnings.

16. Step 7: The liabilities you
need to watch out for

17. •Capex considerations: If the company’s spending a fair
amount of money on expansion - Where is this cash is
coming from; Cash reserves, Debt, or otherwise?
•Debt will imply increasing interest cost
•Higher finance charges / interest cost imply that lenders
such as banks view the company as HIGH RISK
•Should you be investing in a high risk company?
What is their interest cover ratio?
•The interest coverage ratio is used to determine how easily
a company can pay interest expenses on outstanding debt.
The ratio is calculated by dividing a company's earnings
before interest and taxes (EBIT) by the company's interest
expenses for the same period.
You’re not covering two specific ‘liabilities’ – What are
they and how do you use them?

18. Example: EBIT
Interest expense
XYZ Co. LTD
Net income R420 000
Interest expense (R390 000)
Company XYZ can cover interest payment 1.8
times per period, which is fairly safe.

19. Step 8: The one figure you need to
define your earnings potential

20. ROE (Return on Equity): Indicates how well a company's
management is deploying the shareholders' capital.
•ROE is more than a measure of profit, it's a measure of efficiency
•A rising ROE suggests that a company is increasing its ability to
generate profit without needing as much capital
•Falling ROE is usually a problem

21. Formular : ROE = Net income
Shareholders equity
R10 000 000
R 20 000 000
= 50%
This means that Company XYZ generated 50c of profit for every
R1 of shareholders' equity last year, giving the stock an ROE of
50%.
Key points:
Write downs and share buybacks can artificially boost ROE
High level of debt can artificially boost ROE (+ debt; -shareholders
equity as a % 0f total assets the higher the ROE can be)
Compare this ratio with companies in same industries

22. Step 9: The autopilot money maker

23. Dividend: A payment made by a corporation to its shareholders,
usually as a distribution of profits.
Dividends are one of the main reasons why investors buy shares
because they are, by nature, an investment income.
Questions you need to ask:
•Is the company paying dividend?
•Has it always maintain the dividend payment?
•Are the dividend paid from company profits? (sustainability)
•Is the company paying a progressive dividend? Is the pay out
•increasing/ decreasing over certain period(ex- growth)

24. Step 10: How to decode
company prospects

25. Outlook
Finally, taking steps 1 - 9 into account, consider if management sound
optimistic or pessimistic about the future.
Is their tone is appropriate, and consistent with the results? If the results
are a disaster, but management is massively optimistic, then questions
have to be asked…
Often management will try strike a balance between how tough the
environment is (because any downside is then ‘not’ their fault) and how
well the company is positioned to capitalize on opportunities (because
shareholders are so lucky to have them as management).
Ignore the clichéd “balance” remarks, and rather focus on specifics -
quantifiable and/or event-based.

26. Example
In the prospects section of a coal mining company, I would ignore all
comments on how tough mining is in South Africa and the softness in the
coal price (we all know this already), and would rather focus on any
specific comments regarding new mines coming in, old mines shutting
down, acquisitions in the pipeline and/or any more focused, company-
specific commentary.
These directly impact on your feeling for the company’s results over the
short-term.

27. Conclusion
•If you have able to tick all 10 or minimum 7 boxes in this checklist, you
are looking at a great company with a great near term upside, you can
invest in those shares.
•When you get comfortable doing this, you should be able to do so within
ten or so minutes.

28. Thank you
Contact details: 011 384 2948/
tradingdesk@vunaniprivateclients.co.za