FMAccounting.com » INTERPRETATION:ANNUAL REPORTS

How To Check For Companies Who Might Propose Bonus Issue

slang — Wed, 19 May 2010 07:56:21 +0000

Zhulian Corp Bhd, a public listed direct selling company has proposed:

• A one-for-three bonus issue of 115 million shares of 50 cents each

• As at 30 th April 2010, Zhulian’s issued and paid-up capital stood at Rm172.5mil comprising 345 million shares and with the proposed bonus issue enlarging the issued and paid-up capital to Rm230mil

• The proposed bonus issue would be wholly capitalized from the company’s retained profit accounts

So as a public investor, is there way(s) or likely symptoms/telling tales to understand whether a company intends to have bonus issue – read my article on how to check for companies who might propose bonus issue.

What is Price-to-cash flow ratio? How useful is this ratio?

slang — Mon, 12 Apr 2010 08:32:52 +0000

MARKET RATIO: Price-to-cash flows-ratio

One of the business ratio analysis which we often come across is the Price-to-cash flow ratio.

Append below in summary what is this market ratio is all about:-

Ratio	Purpose	Formula
Price-to-cash flow ratio	To measure whether a company’s share price is high or low in the context of its cash flow. Useful as it indicates the company’s market value plus enabling competitor analysis among companies. Important as this ratio can also indicate the future financial health of a company	Price-to-cash flow ratio =Share price/Cash flow per share{ Cash flow per share = (Operating cash flow-preferred dividend)/Number of common shares outstanding
Simple illustration:
ABC Ltd has share price as $20 per share and its cash flow per per share is $10.ABC Ltd’s price-to-cash flow ratio =20/10=2Its indicates how much an investor will paid for its $1 of cash flow generated by the company i.e. $2 in stock.
Interpretation: The lower the price-to-cash flow ratio means the more the company may be undervalued which poses good opportunity for investment.
Salient points to note: This business ratio is useful as it does not need to go through the process of using net income less depreciation and amortization charge The disadvantages is that cash flow is not static and different industries are associate with different price-to-cash flow level Note that to be comparable the price-to-cash flow ratio should be used in companies which sells similar products and services A related ratio is the price-to-free cash flow which is cash that is available to benefit the shareholders and after deducting capital expenditures from operating cash flow. This price-to-free cash flow ratio shows how much investors must pay for each $1 of free cash flow)

What is Price-to-sales ratio? How useful is this market ratio?

slang — Mon, 12 Apr 2010 03:25:09 +0000

Market ratio: Price-to-sales-ratio

One of the business ratio analysis which we often come across is the Price-to-sales ratio.

Append below in summary what is this market ratio is all about:-

Ratio	Purpose	Formula
Price-to-sales ratio	Measures the relationship between the value of stock and the level of company. PS: note that sales volume is an operating activity of a company	Price-to-sales =Current share price/ Revenue per shareOrPrice-to-sales =Market Capitalization/Annual revenue
Simple illustration:
ABC Ltd has:-Its current share price is $20 and the revenue per share is $10.ABC Ltd’s price-to-sales ratio =20/10=2-
Interpretation: Generally, a low Price-to-sales ratio indicates that a company has better value. In another word, if a company’s price-to-sales ratio is high, the investor is paying more for the company’s sale than if the business market ratio is low.
Salient points to note: This business ratio is ideal for computing the value of a company with no earnings history.In the past, this ratio being frequently used for internet based companies which has no or low earnings records as earning per share, etc cannot be used effectively. The underlying assumption of this price-to-sales ratio is that profits will be made once market share is established. A few considered this as a good business ratio as sales statistics are difficult to manipulate. Unfortunately, nowadays, we also see many public listed companies manipulating their sales figures as the sales figure also form one part of the key performance metric/KPA/KPI.

What is Price-to-book ratio? How Useful is this ratio?

slang — Sun, 11 Apr 2010 12:30:03 +0000

MARKET RATIO:Price-to-book ratio

One of the business ratio analysis which we often come across is the Price-to-book ratio.

Append below in summary what is this market ratio is all about:-

Ratio	Purpose	Formula
Price-to-book ratio (P/B ratio)	Measures the value that the stock market places on a company relative to its book value. Also known as price-equity ratio Frequently used by investors to find undervalued companies	Price-to-book =Current share price/ Book value per share{ Note:(a) Book value= total assets-( liabilities + intangible assets)(b) Book value per share=Book value/ No of common shares outstanding }
Simple illustration:
ABC Ltd has:-Total assets of $100,000: Liabilities & Intangible assets of $50,000. There are currently 10,000 ABC Ltd’s shares outstanding and the market price for one share is $2.00ABC Ltd’s book value per share=($100,000-$50,000)/10,000=$5P/B ratio of ABC Ltd =5.00/2.00=2.5
Interpretation: Generally, a high P/B indicate that a company is overvalued and a low P/B ratio an undervalued company.
Salient points to note: This business ratio is relatively simplistic High P/B might not mean overvalue as the public might view the company’s future are good and earning potential is high Also, in bull market, normally high P/B but during bear markets P/B be similar re: nearer to 1 Also be aware that some consumer and service orientated companies have negative P/B ratio because they have relatively more liabilities than assets This ratio cannot be used singly and should analyzed together with other financial measurements like return on equity, etc and also cash flow and volatility of earnings must be considered too.

Analyzing A Company’s Performance

slang — Mon, 31 Mar 2008 10:43:09 +0000

In the analyzing annual reports category, I have also included many articles on ratio analysis,etc for financial expertise to review/analyse the performance of an entity.

In addition to this ratio analysis, we should also look at broadly the following four(4) segments/spectrum so as to be able to adequately conclude on the entity’s performance:

Industry analysis
Business analysis
Management quality
Financial analysis

In the Industry analysis, we should review the following:

Structural characteristics
Basis of Competition
Barriers to Entry
Demand/Supply Scenario
Government Regulation/policies

For Business Analysis:

Market position
Product Diversity
Operating eficiency
Cost Structure
Raw Material Supply
Labor Relations

For Financial Analysis, we have:

Accounting quality
Earnings protection
Cash Flow Adequacy
Financial Flexibility\

Last but not least the Management quality should be reviewed for:

Track record
Capacity to overcome adversities
Goals, philosophy and strategies

All Topics Under The Heading Of Financial Accounting Ratio Analysis Or The Interpretation Of Financial Statements In The Annual Report

slang — Thu, 13 Mar 2008 10:17:18 +0000

The following topics under the above heading are:

FINANCIAL ACCOUNTING RATIO ANALYSIS IN BANKS & FINANCIAL INSTITUTION:-

An Introduction To Asset Quality Of Banks & Financial Institution

Asset Quality Of Banks & Financial Institution-Ratio Analysis (Part 1)

Asset Quality Of Banks & Financial Institution-Ratio Analysis (Part 2)

Asset Quality-Adequacy Of Loan Loss Reserve

FINANCIAL ACCOUNTING RATIO ANALYSIS OF A COMPANY:

Financial Accounting Ratio Analysis-Commonly or Frequently Asked Questions

Financial Accounting Ratio Analysis- The Common Size Financial Statements As A Tool Used In Ratio Analysis

Financial Accounting Ratio Analysis-Principal Tools Used In The Analysis Of Financial Statements

Financial Accounting Ratio Analysis-Guides To The Analyzing of The Financial Statements

In The Annual Report

Assessing The Quality Of Management

Assessing The Quality of Earnings

Ratio Analysis-The Market Valued Added (MVA)

Ratio Analysis-The Market To Book Ratio

Ratio Analysis-Sources Of Information Available

Ratio Analysis- The Defensive Interval Ratio

Financial Ratio Analysis-Assessing the LIQUIDITY of a company

Financial Ratio Analysis-Assessing the PROFITABILITY of a company

Financial Ratio Analysis-Assessing The ACTIVITY of assets utilised of a company

Financial Ratio Analysis-Assessing the LEVERGE OR GEARING of a company

Financial Ratio Analysis-Assessing the MARKET VALUE of a company

Financial Ratio Analysis-ALTMAN Z SYSTEM to forecast BANKRUPTCY of a company.

Price Earning Ratio-Is It A Useful Ratio To Understand?

Financial Accounting Ratio Analysis-Which Ratios have the Value?

BASIC UNDERSTANDING OF THE FINANCIAL STATEMENTS:

Understanding The Financial Statements-Cash Flow Statements(Part 4)

Understanding The Financial Statements-The Income Statement(Part 3)

Understanding The Financial Statements-The Balance Sheet (Part 2)

Understanding The Components of The Financial Statements (Part 1)

INTERPRETATION OF FINANCIAL STATEMENTS:

How To Spot Companies Which Are Likely To Issue Bonus Issue.

How To Spot Undervaluation in The Notes To The Financial Statements (Part 1 of 2)

How To Spot Undervaluation in The Notes To The Financial Statements (Part 2 of 2)

WHAT IS IN THE ANNUAL REPORT/FINANCIAL STATEMENTS?

Financial Accounting Ratio Analysis-What Is In The Annual Report

Financial Accounting Ratio Analysis-Reading The Chairman Report

The Chairman’s Statement In The Annual Report

Reading The Directors’ Profile In The Annual Report

Notes To The Financial Statement-Related Parties

Notes To The Financial Statement-Income Tax

DUPONT SYSTEM:

Dupont System-An Overview Of ROA & ROE

Dupont System-A Matter Of Leverage Or Is It Financial Efficiency

OTHERS:

What are Growth Companies?

What is Overtrading- Definition, Causes, Consequences And Remedy

Air Asia Bhd –Substance Over Form

What Is Secret Reserve

Financial Accounting Ratio Analysis- Understand What Is Free Cash Flow

Competitive Analysis Using Financial Accounting Ratio Analysis

Financial Accounting Ratio Analysis- What Other Factors Beyong Ratios That Needs To Be Considered

Financial Accounting Ratio Analysis- Basic Understanding of existing and potential net tangible assets basis (NTA)

GEARING-Its Determinants & Advantages and Disadvantages

Income Tax

slang — Thu, 22 Nov 2007 12:27:24 +0000

In the Notes To The Accounts in the financial statement, we see the term Income Tax expense.

This article discuss what is in the Income Tax Category which includes Current Tax Payable and Deferred Tax.

The Income Tax expense comprises the sum of both the tax current payable and Deferred Tax.

TAX CURRENTLY PAYABLE

Based on taxable profit for the period
Taxable profit differs from net profit as reported in the Income Statement because it excludes:

items of income and expense that are taxable or deductible in other years and

also excludes income statement items that are never taxable and deductible

DEFERRED TAX

Is the tax EXPECTED to be payable or recoverable due to:

differences between the carrying amounts of assets and liabilities in the financial statements and

the corresponding tax bases used in the computation of taxable profit

Deferred tax is accounted for using the Balance Sheet Liability Method.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized.
Deferred tax is charged or credited in the income statement except when it relates to items charged or credited directly to equity in which case the deferred tax is also dealt with in equity.

In Deferred Tax we have the

(a) DEFERRED TAX LIABILITIES:

Are generally recognize for all taxable temporary differences

(b)DEFERRED TAX ASSETS:

Are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized.
For deferred tax asset, the carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered.

Deferred tax liabilities & deferred tax assets are not recognized if the temporary differences arises from:

Goodwill(or negative goodwill) or

From the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit

Related Parties

slang — Thu, 22 Nov 2007 12:04:32 +0000

Normally, in the notes of the Accounts in financial statement, we often see terms like related parties. This article looks at what really is the term called Related Parties.

Related parties basically falls into two categories:

An INDIVIDUAL is related to the company if the individual

1. Has directly or indirectly, control or joint control or significant influence over the company or

2. Is a member of the key management personnel of the company or

3. Is a close member of the family of the individual in (1) & (2)

An ENTITY is related to the company if the entity

Has directly or indirectly, control or joint control or significant influence over the company or
is controlled by or under common control with the company or
is an associate or jointly controlled entity of the company or
is controlled, jointly-controlled or significantly influenced by an individual related to the company.

Chairman’s Statement

slang — Wed, 30 May 2007 15:50:04 +0000

In earlier articles, I have mentioned that it’s important to look at the Chairman’s Statement as it might revealed what are the company’s prospect / outlook.

It is interesting to note that there are further other comments that are revealed in the Chairman’s statement – a typical example is the Chairman statement of public listed company, MP Technology Resources Bhd wherein its executive chairman, Mat Hassan Bin Esa highlighted the case of mismanagement which resulted in a greater group losses.

Read on – the detailed Executive Chairman’s Statement downloaded from KLSE website:

EXECUTIVE CHAIRMAN’S STATEMENT OF MP TECHNOLOGY RESOURCES BHD

Dear Valued Shareholders,

It is our great pleasure to pen our thoughts, to reflect our past performances and to further unveil to you our future plans. Once again, on behalf of the Board of Directors of MP Technology Resources Berhad, I am pleased to present the Annual Report and Financial Statements of the Group and the Company for the financial year ended 30th November 2006.

FINANCIAL REVIEW

The Group revenue for the year was RM22.1 million as compared to RM110.4 million reported in the previous year. The Group also registered a loss before taxation of RM142.99 million as compared to RM27.7 million loss before tax reported in the previous year. After deducting taxation, the Group losses for the year was RM 142.99 million as compared to losses of RM30.3 million in the previous year. Thus in terms of earnings per share, the Group performances resulted in loss per share of 0.624 sen per share compared to an earnings per share of 0.134 sen in the previous year. The Group reported a negative shareholders’ funds of RM58.92 million as compare to RM82.71 million in previous year, which resulted in lower net tangible assets per share of (RM0.25) compared to (RM0.19) in previous year.

OPERATION ACTIVITIES & FUTURE OUTLOOK

I wish to highlight to the shareholders that due to mis-managed by previous management, the Group has suffered heavy losses as stated above. When I took over the management in the month of November 2006, the Board instructed the group accountant to do internal investigation of the affairs of the group accounts.

The internal investigation report which was submitted to Bursa Malaysia Securities Berhad highlighted a full disclosure of doubtful account receivables. The Board subsequently decided to make necessary adjustments to the accounts which resulted a deficit in its adjusted shareholders’ equity on a consolidated basis amounting to RM58.92 million.

In view of the above, the company is categorized as an Affected Listed Issuer pursuant to Practice Note No. 17/2005(“PN17”) of the Listing Requirements of Bursa Securities.

Further to the internal investigation report, the Board of Directors has lodged several police reports in relation to the Financial Irregularities.

Due to the above problems and the changes in Board of Directors and management; it was a tough year for me as Executive Chairman. I had taken initiative to seek for suitable candidates as Independent Non-Executive Directors and also managed the operation together with my other Executive Directors and Operation Directors at subsidiaries levels.

The Board of Directors has taken steps to regularize the operation of the group by appointing professional advisors for the purpose of restructuring exercise.

APPRECIATION

On behalf of the Board of Directors, allow me to extend our sincere thanks and appreciation to our valued customers for their continued support and loyalty, to the relevant government authorities for their continued guidance and assistance, and to our associates, bankers and business partners for their continued support and trust.

Last but not least, I would also like to extend our deepest appreciation to the management and staff for their contribution and dedication to the Group during the year.

All in all, I should like to end by thanking you, the shareholders, for placing your faith and trust in our company. We will use our best endeavours to create shareholders value and taking the Company to a greater platform in year 2007.

Mat Hassan Bin Esa

Executive Chairman

4th May 2007

How To Spot Companies Which Are Likely To Issue Bonus Issue

slang — Thu, 26 Apr 2007 10:25:23 +0000

For readers to have a fuller understanding of the mechanism of bonus issue, please go through all the other articles in this blog:

In earlier articles in this blog, I have also mentioned about the ways to spot undervaluation. To add on, this article seeks to explain how we can use the financial statements in the annual reports to spot Companies that might need to do Bonus Issue.:

Illustration: Balance Sheet Of ABC Ltd

	$’000
PROPERTY, PLANT & EQUIPMENT	2,700
CURRENT ASSETS
Inventories	2,300
Trade Receivables	1,300
Other Receivables, deposits & prepayment	500
Tax recoverable	1,500
Cash in Hand & At Bank	900
	6,500
Less: CURRENT LIABILITIES
Trade Payables	650
Other Payables & accruals	3,000
Provision for Taxation	50
	3,700
NET CURRENT ASSETS	2,800

Represented by:
SHARE CAPITAL	200
RETAINED PROFIT	2,600
	2,800

Guides/Comments:

If you look at the above sample Balance Sheet, the following should catch your attention:

Share capital looks small/UNDERCAPITALIZED
Cash in Hand and At Bank is very much smaller than the figure shown in the Retained Profit row. What it means is that the money had been already being invested in some major expenditure namely Property, Plant and Equipment ( $2,700 )
Annual sales/turnovers have also been increasing where cash needs to be conserved to buy additional fixed assets or finance the working capital.
Furthermore, as the share capital is so small that in the Notes to the Financial Statement both Earning per share and Dividend per share/Dividend Yield will not show a true realistic % which is not comparable to other companies in the same industries. This can cause grave distortion to analysts and the public investors

From the above scenarios, they posed good opportunities for a company to issue Bonus Issue which is a simple bookkeeping entry exercise re: the Transferring from Retained Profits to Share Capital rows ( Debit Retained Profits Credit Share Capital).

The first main objective of this transfer or technically called “capitalization of reserves” is to “freeze the reserves that investors/outsiders might otherwise think that can be distributed to them in terms of dividend. ( actually there are no enough cash to distribute as most of the profit/ money were used to buy Fixed Assets)

Secondly, the main objective is to align all the Earning per share and Dividend per share/Dividend yield into their correct perspectives.