Is it to have a stock screener? or to have a state-of-the-art charting software? Is it to source these stocks from publications, both online and offline? or to follow the writings of a stock guru, a multi-millionaire, a billionaire … etc? Does having all of the above guarantee consistent profits from your venture in stocks?
What do you think?
Before I share my views, I think, it is important to first understand who I am and how I invest in the stock market. So, here is my profile:
‘I’m a value investor who invest primarily for dividend income. I have a portfolio filled with stocks that are solid in fundamentals which pays consistent recurring dividend income on a quarterly or semi-annually basis. I would collect dividends in 8-9 months out of 12 months a year.’
With that, let me reveal to you what my #1 Arsenal is – Annual Reports.
To some, I understand that Annual Reports are simply ‘meaningless documents’ that consists of hundreds of pages of meaningless words and figures. But, in my opinion, Annual Reports contain a wealth of information that enables me to sift out good stocks which would pay me consistent growth in dividends and others that could not do so.
I can’t invest in a stock without first reading its Annual Reports. To me, buying a stock without it is extremely risky. It is tantamount to betting and gambling.
If you are new to stocks, I would like to encourage you to first learn how to read a stock’s annual reports. It will help you to grow as a stock investor. But, if let us say, you are reading this and are contemplating what does reading reports have to do with stock investing, please read on. I’ll share how do true value investors dissect the reports and get an upper hand over the others in the stock market.
What do Value Investors Want to Know?
Speaking for myself, here is a list of questions I would like to answer first before evaluating its stock price. They are as follows:
- What does it do to make money a.k.a Business Models?
- What is its track record for generating profits and cash flows?
- Does it have ‘more-than-enough’ resources to expand for the future?
- What is its plans to grow or expand into the future?
- Who owns and runs the company?
They are an assessment of a stock’s fundamental qualities. Upon passing these five questions, I would only then look into its stock price to assess its valuation. Next, I’ll share a simple guide to reading an annual report. Here we go:
The 5-Minute Test – Group Financial Highlights
Most Annual Reports, if not all, will present a summarized version of the stocks’ group financial results for a period of five or ten years. If you want to save time, you may spend around five minutes to read that first. I believe, the major focus is to identify a stock’s long-term track record of growing profits consistently for I am interested to invest in such companies only.
Here, I would focus on two main information:
- Net Profits / Profits attributable to Shareholders.
For instance, which of the two stocks would you prefer to invest in?
Let us assume you prefer Stock A over Stock B, then, you may focus your efforts to learn more about Stock A and ditch Stock B altogether.
How to Assess the Financial Strength of a Stock in Greater Detail?
You may read a stock’s financial statements which are often found at the centre of its annual reports. They are presented in a bi-annually format. Let us say, you downloaded a stock’s annual report for the year 2019. Hence, these statements would present the financial results of a stock for 2018 and 2019.
If you wish to learn about a stock’s financial results for the last ten years, which is highly recommended, you may download five of its annual reports. Let us say that the latest annual report is for the year of 2019. Then, you may download:
A financial statement consists of three statements. They are as follows:
- Statement of Profits and Losses
Let us say a stock’s financial year end is 31 March 2019. It reports if the stock is generating profits from 1 April 2018 to 31 March 2019, which is a 12-month period.
- Statement of Financial Position
If a stock’s financial year end is 31 March 2019, it tells us, as of the date of 31 March 2019, what and how much the stock owns and owes.
- Statement of Cash Flows
It reports on the cash flow movements of a stock in a 12-month period. To me, it is a great place to find out whether or not a stock is capable of paying recurring dividends to investors or to grow in the future.
The above is just a brief introduction. I’ll share how to read them in great detail in my next few write-ups.
Who Owns the Company?
A stock would make a list of its major shareholders and would present its list in its annual report under ‘Analysis of Shareholders’. Here, my focus is to identify who they are, how much shareholdings do they hold, and whether or not if the major shareholders are members of the companies’ board of directors.
My focus is to find out if the companies’ board of directors or management are more likely to act favourably or in line with shareholders’ interest. My theory is that if the directors are shareholders of the companies themselves, then, more likely than not, they would act in favour of shareholders for a portion of wealth of these directors are tied up to the value of the companies’ shares.
More to be Discovered …
Obviously, I have just covered the basics of what information is readily available in a stock’s annual reports. The purpose is to encourage you to start learning on the art of interpreting annual reports before investing into any stocks. If you are convinced, that is awesome. You are on your way towards investment success.
With that, let me hand you a homework. Refer to the 5-Minute Test. Please feel free to download annual reports from Bursa Malaysia or SGX and identify up to 20-30 stocks that resembles financial results of Stock A.
Keep that in your list and stay tuned for my next few write-ups.
If you are looking for great stock to invest in, you would be interested in having a look into our “Weapon of Mass Dividend Report” where we highlight five great dividend stocks that you can start you investment with. You can download the E-Book for FREE right HERE.