How to read company results

Simon Brown, founder and director of
Simon Brown, founder and director of

Recently, I was reading a newly released set of results. 

I thought I’d share my procedure for going through them.

The first piece of data I turn to is the dividend because it is the one (only?) piece of information that cannot be fudged. 

It is a 100% true number as the company has to ultimately pay this dividend, and therefore must have the money in order to pay it. 

All the other numbers will undoubtedly be within the international financial reporting standards (IFRS) rules and signed off by the auditors (in the case of year-end results). 

But accounting is not as an exact science as often assumed, so results are really just a fair reflection of a set of results. 

Dividends are absolute.

But I also have other favourites.

Next up are headline earnings per share (HEPS) and, as always, I ignore all the different ones the company may have introduced. 

I focus on the two HEPS numbers as required by IFRS – normal and diluted. (The latter takes into account known share issues in the future such as director options, among others.)

Leverage is my next real test for a company. 

In “Simon says” of the 16 November 2017 edition, I wrote how Clicks offers a perfect example of leverage in that revenue was up, operating profit was up by a larger percentage, HEPS by an even larger percentage and finally that the dividend had increased by the largest percentage. 

This shows great operational efficiencies whereby increased revenue just gets better as we run our eye down the list of other numbers.

I then want to see how cash flow is doing. Is the company generating cash? How much of its operating profit actually falls into the bank balance as cash flow? 

Again, this is about cash being king (as with the dividend), and increased cash shows that the company is in a strong position.

From here it depends on the company. Some CEO and/or chairperson statements are well worth the read.

Two I read every time even though I don’t own the stocks, or am unlikely ever to own them, are Sean Riskowitz’s of Conduit Capital and Piet Viljoen’s of RE:CM. Unfortunately, far too often this section reads like the CEO or chair got a PR firm to write their statement. 

The same can also be said for the outlook statement that reflects on the next period of operations. 

Here we often see little real information, and rather just get statements about how the current conditions are tough/great/challenging and likely to continue, although management is trying to do (even) better.

The lack of attention to these two parts of the results is disappointing, as it really is an opportunity for a company to explain its business and the drivers involved. 

The last step in my quick assessment is to check operating margins. This is the profit after the direct variable costs of running the business such as staffing costs, input costs, and so on.

This again indicates operating efficiencies and can be compared to previous periods as well as peers within the sector.

I do eventually read the entire set of results if it is from a company I own or am interested in. As my job entails knowing a great deal about a lot of listed stocks, I do tend to read most results that come out. 

But I have a last hack for those companies that are extra special to me (such as those I own). I take the old-school approach, print out the results and get away from my desk to read them. 

I want uninterrupted time to carefully read all the details without the distraction of Twitter, phone calls and the like.

This article originally appeared in the 1 March edition of finweek. Buy and download the magazine here.

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