How do you tell a good stock from one that is not?
Most people look at stock charts. Regrettably, that is how 90% lose money in the stock market. Meanwhile, the 10% who are true stock investors would take time to read a stock’s annual report. It is a document that enables us to truly separate a stock that has potential to grow in value from one that doesn’t.
If you are new to annual reports, perhaps, you will find it overwhelming as the documents are quite thick. To make things easier, I will share with you tips to sift through an annual report like a pro. Here are the three places where you can start reading an annual report.
It is usually placed in the middle of an annual report. There are four items in a financial statement. They include the income statement, balance sheet, cash flow statement and statement of changes in equity.
Often, the first three items are most read. The income statement tells us about the profitability of a stock. The balance sheet tells us what the company owes and owns.
The cash flow statement tells us about a company’s cash flow management and the cash reserves it has. It is where we identify a profitable share and keep it on our watch list. Also, it helps us to identify bad stocks so that we can avoid investing in them.
It is usually placed in the front section of an annual report. This is where we find out what the company has been doing and more importantly, what would it be doing to grow and expand its businesses in the immediate future.
In larger public companies, the Chairman’s Statements are usually short and brief. Their business operations are discussed in greater detail under several statements from CEOs, CFOs, Managing Directors, and even Presidents of their respective business segments if the stock is a conglomerate. Often, a stock that offers detailed discussions on its business operations is preferred as investors are interested to know as much and as intimately as possible of a stock before they invest in it.
Statement of Shareholdings
It is often placed at the end of an annual report. This is where we can find out who the largest shareholders of a stock are and what their shareholdings are at a given point in time. It tells us whether a stock is a family enterprise, a multi-national corporation or a government-linked corporation.
You may check out the shareholdings of each director in a company. If a few directors have substantial shareholdings in a stock, these directors have more incentive to act on behalf of the interest of minority shareholders. It is often a good thing for investors.
Personally, I would take that as a bonus as stock investing is about entrusting these directors to safeguard and grow my wealth by using my money to expand their businesses (or should I say our businesses?).
How about the rest? Aren’t they important too?
Here’s my take. The three mentioned above would help you to decide whether you want to continue assessing a stock deal. If you have found a stock that is not profitable, then, you may move onto the next stock and not be bothered about the rest of the details. Doesn’t it make sense?
However, if you find a profitable stock, then, of course, please dwell deeper into its documents to find out more before investing in the firm.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.