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Old 04-26-2009, 04:49 PM   Nav to Top  #1
Pashka
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Question How do you evaluate a balance sheet/fundementals?

I am a relative newbie and I want to become a more analytical investor instead of a sheep (like many of the veterans suggest). I know fundamentals of a company are UBER important but I'm not sure what metrics to look at in terms of evaluating strengths and weaknesses. Do you guys look at the Income Statement, Balance Sheet, Cash Flow? Do you do a time series analysis so see if there are improvements/deterioration over time? Maybe call the Investor Relations department and grill them on the selling points of the company? Or do you just choose stocks based on the weather pattern over Bermuda? I will appreciate any and all advice that seems sane Thanks in advance for your wisdom

PS I think this will be a good thread for all newbies in this forum so don't hold back

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Old 04-26-2009, 05:10 PM   Nav to Top  #2
AdamJ
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Depends on the type of stock.I'm not going to get into specific formulas but, a more topical view. This is good idea for an article or series of articles.

If you're looking at a venture or junior than Cash Flow and Balance Sheets are important.

If you're looking at a growth company than revenue growth and the operating margin in relation to the cash flow are key. Is the operating margin shrinking and burn rate increasing.

For more stable companies your standard debt-equity and current ratios in addition to net income and earnings per share are more relevant IMO.
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Old 04-26-2009, 06:44 PM   Nav to Top  #3
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Exclamation Basics of the Earnings Report

I too do not have time to write a primer today but just a quick note on some basics,

You are very often looking for Why and When in earnings reports. As we are all looking for a bargain "we are often looking for companies that are down for one reason or another." So we are looking for WHY? Then if we are going to jump in we are wanting to know the WHEN?

I look for trends on the rudimentary spreadsheet review. If a company has been improving quarter over quarter, say from a loss. I look for gains in all asset categories, if any. I look for reductions in all liability categories, if any.

I like to see an obvious direction, such as in per share earnings, Q1 = (-.09) Q2 = (-.05) Q3 = (-.01) and an expected Q4 PROFIT of say a +.02 cents a share

When reading earnings you must read the commentary as well, first I want to know why they have the loss? Then I want to know what they are doing to change it. So the spreadsheet is only a small part of the report. You need to read the "companies review of operations" that accompany the report.

That is where the CEO or CFO explain why they had these results and what has been working and what was not and the WHY for each.

Then don't forget to read "outside info" for the confirmation of this data.

I want to caution you here, Companies are required to give the worst possible outcomes as part of their forward looking statements. A lot of new researchers take these a reasons to not invest, well if you are only going to invest with Rosy forward looking statements, you will never invest again. There "AIN'T ANY"

Take them with a grain of salt. Only know "EVERY COMPANY CAN FAIL"

Look for the optimistic opinions of the company executives in the statements and RATE THEM as an Agree, Disagree,

If you agree, and your research shows it is likely and the stock price is attractive, BUY

If not, stay out! Be a Unless you are willing to short the stock and play the information you found in the opposite just watch it to learn from your analysis. See if you did the right thing. I put the fails on a watch list and play "Pretend."

I have a List in google finance tracking these as if I had invested in them. I place it there like I put $300.00 in each to see where it goes. A good learning tool. It will also suggest when you were wrong and make you take another look if it gains significantly!
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Old 04-26-2009, 06:52 PM   Nav to Top  #4
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Pashka,

I am a relative newbie just as yourself, but here are a few things that I look for when I am looking at a balance sheet:

1) Assets to Liabilities Ratio: Does the company have sufficient assets to cover its liabilities?

2) Is their revenue growing at a steady rate, or is it all over the board (Note: not all sectors can apply to this, as bio stocks can depend on whether their products pass, get bought out, etc)

3) How much of their liabilities are long term vs short term

4) Whether or not they are profiting as a business. You can have all the revenue growth you want, but if you are spending like our government is, your revenue wont be able to keep up.

5) How much of their revenue is "extraordinary" (extraordinary revenue=revenue that can only be made one time/income from business/operations that have been discontinued).

6) Working capital, how much do they have to "play around with"

Hope that helps a little bit if you didnt already know it. Im sure there is much that I dont know that I should be looking for too.
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Old 04-28-2009, 11:01 PM   Nav to Top  #5
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I do a review of the balance sheet. I am generally looking at the liabilities. What kind of debt does a company have and how soon is it due. From there, I look at the current assets/current ratio, but I am always leery of a company with high receivables, especially in today's economy.

I pay close attention to the notes to the financial statements. Potential liabilities may be disclosed there. Also as mentioned by others, look at the revenue trending, the EBITDA margins.

Just a few thoughts.
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Old 04-28-2009, 11:52 PM   Nav to Top  #6
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Lightbulb Good Thoughts.

Originally Posted by capvl99 View Post
I do a review of the balance sheet. I am generally looking at the liabilities. What kind of debt does a company have and how soon is it due. From there, I look at the current assets/current ratio, but I am always leery of a company with high receivables, especially in today's economy.

I pay close attention to the notes to the financial statements. Potential liabilities may be disclosed there. Also as mentioned by others, look at the revenue trending, the EBITDA margins.

Just a few thoughts.
Absolutely.

So much to be learned from reading the boring stuff. And so much money to be had!
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Old 05-09-2009, 07:00 PM   Nav to Top  #7
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All good stuff mentioned above. I'd add the following for relatively new investors. There are a lot of people who will make posts recommending penny stocks. While it is exciting the thought of being able to buy a 1000 shares of a 25 cent stock, the vast majority of stocks such as this are trading at those levels because they are NOT profitable. While they can experience large swings in prices, I would be very cautious and not get caught up in the allure of the thought of a 10 cent stock going to $10. There are plenty of profitable companies that can make you good money with some solid research and discipline.

So in addition to all the other items everyone else mentioned, you should check the earnings and see if the company has positive earnings. This may seem like a no brainer, but I've seen more young traders lose money on a stock because they thought the company had such a great product. Having a great product is such a small part for a company to ever becoming profitable. Now, if you are interested in just doing a short term trade, the fundamentals aren't nearly important as price action, volume, and other things that may be happening with the stock (i.e. recent news releases)

Good hunting!
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