Going Fundamental: Profit and Loss Statement

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source: http://www.nvbc.org

Profit and Loss statement which is also known as Income/Loss Statement, Statement of Performance, Operations report, and better known as P&L is a summarize report of the company's earnings cost and expenses for a given period which is usually a year or fiscal year.

So why should you know what is in this statement?

Basically this statement tells you if the company is making money. It also tells how the company uses its resources well to generate income thus it is sometimes called Statement of Performance or Operations report. 

Like the Balance Sheet it has a basic equation:   

Earnings may come from sale of goods or services. For a retail company like National BookStore its earnings come from the sale of books and school supplies. For SM Malls most of their earnings come from space rental while ICT operates various ports and bill their customers for services rendered.

Now there is a must differentiation we must know when it comes to cost and expenses.

Cost is define as the value forgone to acquire more value. Say what is that again? Sorry for the gibberish definition. In simple terms cost is the value you give away to get more.

Lets make an example. If you are in a retail business which is the simple "sari-sari store" the money you use in purchasing your "paninda" is the cost. 

Now lets make it complicated. If you are in the manufacturing business the money use to purchase the raw materials and the labor you paid to make your final product are part of the cost of the product your business is selling.

But you ask me, that is like expense right? That is "I paid something" so it is an expense.

It may be like an expense and most interchange the meaning of these two words. But now you know that there is a difference between these two specially if use in deciphering important ratios in fundamental stock analysis.

So lets define expense properly.

Expense is a an outlay/outflow of resource(which could be money or a promise to pay) for services or other purchases that the company needs in its conduct of its business.

Again, it's too deep.

Expense are outflow to make sure the company operates, period. So expenses indirectly affect the company's product or service. A retail store may pay rent but it does not directly affect the value of the goods that it sells. 

I guess here is a better way of explaining cost and expenses. A company only have cost when it sells while the company pays expenses with or without a sale. In our previous example the retail store still pays the rent even if it did not sell a single product for the whole month.

Now in the equation if we deduct cost to the earnings(in most reports it is named sales, service or revenue) we arrived at Gross Profit. Gross Profit is the basically the markup on the direct cost of the product or service the company is selling. It tells us basically two things; first it tells how efficient the company is in using the limited supplies and labor and second it tells us how competitive the company is in terms of pricing.

We can see how efficient a company in using limited resource in the reflected Gross Profit. Let us say that the company can only sell its product at 100 pesos and in the past years the cost to make this product is 80 pesos thereby a 20 peso Gross profit or 20% markup. Now if they have a markup of 40 pesos in the same product sold still at 100 pesos that means they have reduced the cost to manufacture the product to 60 pesos giving them a higher Gross Profit of 40%. 

Bible quote of the Day: Matthew 13:44-52

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sources: http://commonmansbiblejourney.wordpress.com and http://list-of-birthstones.com

Jesus said to his disciples: “The kingdom of heaven is like a treasure buried in a field, which a person finds and hides again, and out of joy goes and sells all that he has and buys that field. 

Again, the kingdom of heaven is like a merchant searching for fine pearls.When he finds a pearl of great price, he goes and sells all that he has and buys it. 

Again, the kingdom of heaven is like a net thrown into the sea, which collects fish of every kind. When it is full they haul it ashore and sit down to put what is good into buckets. What is bad they throw away. Thus it will be at the end of the age. The angels will go out and separate the wicked from the righteous and throw them into the fiery furnace, where there will be wailing and grinding of teeth. 

Do you understand all these things?” They answered, “Yes.” And he replied, “Then every scribe who has been instructed in the kingdom of heaven is like the head of a household who brings from his storeroom both the new and the old.”

The gospel today talks about Value. What for you is valuable?

In stock investing we look for stocks of value by using Fundamental analysis. We research and study companies who has potential to be of worth in the coming months or years. 

But far more than knowing the value most people forget that when Value is being sought after one has to make the same amount or maybe near the same amount of sacrifice to obtain such valuable item which in case of the stock market is the stocks.

Far beyond the stock market what are other things valuable that you will sacrifice anything to obtain it? Probably your family, your wife, your work, your house, or maybe your collection. In doing so you on other hand sacrifice something to keep such valuable things that you posses and at times you have to choose because one thing is more valuable than the other like sacrificing your barkada nights to be with your wife, or sacrificing a out of town trip with your college friends to support your childs basketball game.

We have different things we value, we also have different standards when deciding which is valuable. But at the end of the day we must ponder upon if we have been valuable to others. God sees us valuable that He is able to sacrifice His son for us. 

Often times we forget this. There are times that God knocks on our hearts for a charitable work but instead say no to Him because we have been saving up money for that new phone, or we have set that date for your Boracay getaway, or maybe Harry Potter's last movie is out and you want to see it.

P.S. Would like to invite you for something that you might be able to share a little bit of your time, or your blessings, or your skills. There is a GK Build at Bulaklakan Quezon City this coming Sunday, July 31. For more details you can check my blog post at Share Your Helping Hand.

Fundamental side: What are FINANCIAL STATEMENTS?

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source: http://www.nysscpa.org

I have been saying so many things about stocks, analysis, and some weird words that you might have just known through me or probably through the newspaper(again if you want to learn about stock investing our suggestion is for you to read the Business section of the newspaper)

Back in the forum I regularly contribute to we termed these infusion of new and out of the ordinary words as "nosebleed" because by the  time you finished reading it your head starts spinning, your eyes go from left to right and back ten more times and when you can't handle it anymore specially the "English"(that is how we termed it when an ordinary not so "sosyal" guys like us can't keep up with one's English) your nose as a figure of speech will bleed thus the term "nosebleed."

And here I am giving you a new word along with my word of the day post, FINANCIAL STATEMENTS or better known as FS.

What are they anyway?


What? "THEY" meaning not only one but many?

Yup Financial Statements is a collective term for financial reports and schedules that relay the company's financial and some non-financial information. There is a lot of this reports and schedules but as a rule they are contained into 4 separate reports. Basically these are the condensed form of the transaction of the entire company. Being an accountant I already got used to the volume of transactions  a company makes in a year and to have it in one year is really a "nosebleed" that is why we have Financial reports which turns a volume of a year work into 4 - 10 sheets of reports and if you need a guide in deciphering such about another 20-1000 pages of notes.

This is just an introduction of a number of series of post about Financial statements. Again you might ask me "is this necessary in my stock investing?" Well if you want to know what is the company's financial health as a value investor then you need to learn this stuff. I know it is a "nosebleed" but this is one of Warren Buffett's  ways how he earned billions.

Now let us get you acquainted with the 4 Basic Financial Reports and The Notes to Financial Statements

1. Balance Sheet

This is also known as statement of financial position(due to the new accounting rules the entire world is following, the IFRS). What does this report tell you? It tells us about the financial condition of the company at a given time that is why some will say this phrase when presenting this report " as of December 20XX."

source: http://www.forum4finance.com

It tells us how much money the company has, the receivables they have, the properties they have, the other investments they have, the current liabilities they have, the long term debts they have, and the capital or equity they have. Now why do you need these information? These info will help you determined if the company can still go on business for the next coming years, if the the company has enough to sustain its expansion projects and if it is able to pay off its debts and pay you, the investor, dividends. 

2. Profit and Loss

This too has other aliases like Income Statement, Statement of Performance(again IFRS), Earnings or Loss Statement, Operating Statement and others. This report particularly gives us one important info, that is the company's capability to generate profit for a period of time thus you will hear this phrase when this report is presented "for the period ending December 20XX." 

Some termed this profit as bottom line, results of operation, net income, and others. But this report tells us more. It also tells us where did the company get its earnings(for those that have segment reporting), how much have they spent to operate( by looking at the details of the operating expenses), and sometimes details on transaction that are not part of the operating cycle that affects the profitability of the company like extra ordinary loss brought about by disasters, financial loss from investments that the company place extra funds, and others.

3. Statement of Cashflow

This statement details how the company used/generated its cash and how the company arrived at an ending cash in the balance sheet. basically it is divided into three sections: Cash generated/use in operating activities, Cash generated/use in investing activities, and Cash generated/use in financing activities.

4. Statement of Changes in Equity

Also known as Statement of Retained Earnings, it details the changes in the Equity section of the company just like the Statement of Cashflow. It details the changes in the number of stocks, the changes in the amount of invested capital, the changes brought about by dividends, additional income/loss as forwarded from the profit and loss thus increasing or decreasing the companies Retained earnings(Surplus) or Deficit, and other changes brought about by changes in the equity.

5. Notes to Financial Statements 

Again this is an additional to the above statements that will help you decipher the different total amounts presented in the reports. It could be from 1 page to more than 1,000 pages depending on the complexity of the company. These notes may include discussions on how the company did there operations, other investment ventures, some recognition principles adopted per the current accounting standards, some notes on judicial proceedings of the company and the likelihood of such, and other notes that the company may deem appropriate to help investors like you and me make a decision to invest in their company.

I guess this introduction got quite long, I would from time to time discuss one of this in a separate post so that you have a clear idea about these and at the same time explain the concept so that you wont be putting too much time in learning these statements. Once you get the idea behind it it would be easy for you to analyze these financial information.

Also if you need such statements for the listed companies in the Philippine Stock Exchange you visit their website www.pse.com.ph and look for the company and you can find their latest filed reports under the Corporate Information link.  

Citiseconline Platform No.3: Company Snapshots

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Citisecoline has a report called Company Snapshots where analysis of there certified technicians give an overview of a particular stock. Log in to you Citiseconline account and follow theses steps:

From the Home page go to the Research tab

Click Fundamentals

Click Company Snapshot

Going Fundamental: Common Size Ratio Analysis

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I'm back! Sorry for the long absence. I have just made the greatest investment in my life, finding the one.

So lets go back then where we were. If ever you are in a seminar about stock investing they could probably discuss some accounting stuff like the one above.

Common Size Ratio analysis is basically comparing one company to another by the percentages. The basic comparison will be the FS analysis express in ratios. This analysis primarily focuses on the Profit and Loss statement or also known as Income or Loss Statement.

For example Company A and B using basic data.

Looking at the two company only at the amounts one can say that Company A is better due to its higher sales but looking at percentages we now see the difference of the the two company. Company B is better than Company A in terms mark up and management of expenses thus though Company A and B ended up with the same profit Company B shows a better management of cost and better pricing or market penetration.  

PSE Website part 9: Basic Charts

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source: http://www.greekshares.com/ 

Now that you know how valuable a chart is lets check out the PSE website for some charts. You can go to the Chart tab in the information link of stock you are looking at, for illustration purposes lets use FGEN:

 The basic charts are the Price chart of the high, low, open and last traded price of the stock. Each is represented by a color. Usually the PSE opens the charts at a annual chart range.

In the left side you can see the Chart options. You can change the date range which are 6 month, one year and two year. Chart type could be Line, Bar, Candle Stick, and OHLC(Open-High-Low-Close)

 You can also chose what indicator would you like to view. Below the Price chart is the  Volume chart which represents the number of traded stocks for that period or time frame.

Two famous indicators charts are also shown: MACD and Stochastic. I am not an expert in Technical analysis but got this info from www.ehow.com regarding these two well known indicator charts:

MACD analysis
Observe the interaction between the fast and slow lines. When the fast signal line(blue line) rises above and crosses the slow MACD line(red line), it means buyers are starting to dominate and a trader might consider buying that particular stock. When the fast line falls below and crosses the slow MACD line, it means sellers are starting to dominate and a trader might consider selling that particular stock.

Stochastic Analysis
Look at the instances where the %K line crosses and rises above the %D line. This indicates point when you should buy the stock. And if you look at the instances where the %K line dips under the %D line, then this is a signal to sell.

What is the rationale for this method of stochastic interpretation? The %K line is above the %D line when the price is on the rise, and it lies below the %D line when the price is falling. And because stock traders aim to buy low and sell high, these crossings signal the appropriate time to buy or sell.

For another way to interpret the stochastic oscillations, observe when the %K and %D lines rise above .8 = 80% and dip below .2 = 20%.

When the %K and %D lines rise above 80%, many stock analysts recommend selling as soon as the lines dip back down below 80%. And when the %K and %D lines dip below 20%, analysts advise stock traders to buy once the lines rise above 20%.

Investing word of the day : Chart

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If you go to the PSE website and look up a stock it will lead you to the stock information page of that stock. 

To better understand this section let us define what chart means which in investing is called price chart:

(information taken from http://stockcharts.com/)


A price chart is a sequence of prices plotted over a specific time frame. In statistical terms, charts are referred to as time series plots.

On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale. Prices are plotted from left to right across the x-axis with the most recent plot being the furthest right.

While technical analysts use charts almost exclusively, the use of charts is not limited to just technical analysis. Because charts provide an easy-to-read graphical representation of a security's price movement over a specific period of time, they can also be of great benefit to fundamental analysts. A graphical historical record makes it easy to spot the effect of key events on a security's price, its performance over a period of time and whether it's trading near its highs, near its lows, or in between.  


Layman's explanation: 

A chart is a picture that an investor can see how the price of a certain stock move over a period of time. 

This is important because it is where one can see the trend. Also one can use this as basis on how a stock react to certain events in the company. Knowing this information gives you an idea how will the trend be in the next couple of days , weeks or months and thus help you in your investing decisions whether to hold, sell, or buy.

What is P/E ratio?

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 source: http://www.tradingcritic.com/

Here is another important Fundamental analysis that one can use in gauging a stock.

Price earnings ratio or commonly known as P/E ratio is a valuation ratio. A simple computation is dividing the market price per share by EPS per share or dividing market capitalization by net income. P/E ratio is an indicative of how the market or investors value the stock. A higher P/E ratio means the investing market is willing to pay for such stock that number of times for its earnings. It indicates that the perceived expectation of the market is that the company will perform well thus they are willing to pay more for it.

Knowing the P/E ratio gives you two information when you use it to compare stock buys. Stocks with higher P/E ratio are stocks that are probably believed by the market as profitable in the long run and the second is if comparing stocks with the same level it indicates which stock is overpriced.

For example Company A has a P/E ratio of 18 while Company B has 6, this indicates that Company A is perceived by the market as having more profit generating capability than Company B. But upon looking closely when such two companies have the same EPS it only means that Company A is over priced as compared to company B.

Investing terminologies 101: Fundamental and Technical Analysis

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 source: http://www.babypips.com

 

I know you don't want to hear this gibberish words because as we Pinoys say it "dudugo ang ilong" (my nose will bleed) and you end up in the mental hospital because you will loose your sanity once you read and try to understand this words. But if you are really serious in investing this is a must and I insist that you start reading the business column of the newspaper instead of the horoscope section.

One thing more lest get the definitions of this two words from Wikipedia.org:

Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis.Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts.

Technical analysis is a security analysis discipline for forecasting the future direction of prices through the study of past market data, primarily price and volume.

I think the description from Wikipedia is enough to explain these two words but let me further explain.

When buying how do you determine the price of a product? Isn't it that you either refer to the old price you know or you might do what we call canvassing right? It is the same with the stock market. You need information to determine the right price for the stock you are buying. With these information of course one should analyze so that a final prize could be pegged to such stock you are buying. In the Philippine Stock Exchange the rule is to not to be 3 level higher or lower from the last traded price based on the Board lot and fluctuation schedule. 

Fundamental analysis primarily gives you the idea what the stock's value based on the historical record which we call Financial Statement. You get to see the Assets(properties) and Liabilities(debts) of the company by looking at there Balance sheets or Statement of Position. It also shows distribution of ownership of the company in its Stockholders Equity. With these information one can analyze the valuations such as Liquidity(capacity to pay current debts), Working Capital(capacity to operate the business) and some other else.( I told you you might say "dumudugo na ang ilong ko Louis").

Another report usually called Profit & Loss report or Statement of Performance shows the companies results of operation on a particular period. This report will give you a picture of where does the company sell or earn, what expenses are spend to operate, and how much earnings did the company make. 

These information help you determine if it is wise to invest in the stock because it shows the viability of the company to earn in the near future and thus reward you with dividends(that's what we get when the board of directors are generous enough to share some profit of the company in other words its ka-ching!)

Now technical analysis on the other hand is more of a forecasting analysis. Let say its as if you are reading the horoscope of your chosen stock to invest into. These is where the word TREND comes. Data use in these analysis are the prices and trade volume of the stock. These analysis indicate the likelihood of the stock going up or going down. Usually it makes use of charts to visualize the possible outcome of the stock price. It shows when did investors and speculators bought a lot and at what price. An uptrend does not usually indicate that the stock's value is going up. It might be a result of speculators hoping to make a short gain due to some news or other market forces that is happening in the world(observe the current Greece debt crisis and debt releif and the recent Philippine election in which Noynoy was the leading presidential candidate)

Technical analysis gives you an idea when the stock price may rise or fall. With that knowledge you will be able to plan when to buy good stocks(buy stocks with good fundamental analysis when prices are down) and sell(when the price of the stock is near or above your target price or if the price surpass your breakeven price per stock). You only gain when you have sold your stock above your total acquisition cost(that is the price you bought that stock plus cost to by it like brokers commission, SCCP charges, Stock transaction tax, etc.)

Now tell me are these two words not worth knowing? If you do or you don't leave a comment and let us talk about it.