Sunday, May 18, 2008

Basics of Investing - Part V

The Financial Aspects

I would like to reiterate that one of the important consequences of a formation of a limited liability company, listed on a Stock Exchange (such as Bursa Malaysia) is that
ownership and management are often segregated. That means professional management is hired to run the company and the owners are not involved in the day to day running of the business.

This presents a dilemma for the owners.
After all, if you are a part owner of the business, wouldn’t you like to know how the company is doing? If the company has not been performing up to your expectations, you would like to reprimand top management. Conversely, if the company is performing exceptionally well, maybe its’ time to give your management a bonus to retain them.

Over the years, a framework has been set up to allow the shareholders (i.e. owners) or prospective investors to assess the performance of companies listed on the stock exchange. The reason why the information has been standardized and regulated is simple. A single public listed company could have thousands of owners, depending on its’ float. Therefore, there must be a standard mechanism to provide the information to all these investors in a fair and uniform manner.

If each and every one of these part owners started requesting information from the listed company at their whim and fancy, the Finance Department of this Company would collapse!

Today, we will be looking at the critical information provided by public listed companies on the Bursa Malaysia, which is vital to us assess their performance.

(a) Annual Reports
Annual Reports are a report which reviews the company’s overall performance for the year. The Annual Reports made available to the shareholders, within four months after the financial year end. Although Annual Reports vary from company to company, there are typically three segments that you should focus on:

(i) Operating and Financial Review (OFR)
The OFR typically comprises of the letter from the Chairman, Managing Director’s review, Management Review and other non financial information. The information contained inside should give you an insight into the competitive advantages held by the company, the challenges it faces and its’ future visions and plans.

(ii) Corporate Social Responsibility (CSR) Initiatives
The presence or lack of CSR initiatives in the Annual Report should be apparent once you review the Annual Reports. Be sure to go through this section carefully to see that the company actually cares about its’ CSR, rather than this just being a Public Relations (PR) exercise.

(iii) Annual Audited Financial Statements
Last but not least, this is the where the REAL MEAT lies, if you truly wish to assess the companies’ financial performance. Typically, it will consist of several sections, the Income Statement, Balance Sheet, Statement of Changes in Equity, Cash Flow Statements, Auditors’ Report and Notes to the Financial Statements.

(b) Quarterly Reports
For investors like you or me, the information contained in the Annual Reports is extremely useful. However, there is one problem! You only get the reports annually. If you have to wait for a period of once a year to assess the company performance, this is not timely at all.

You bought shares in ABC Berhad for RM10 per share based on the Annual Report for the year ended 31 December 2006 made publicly available on Bursa Malaysia on 30 April 2007. ABC’s Berhad’s financial year end is 31 December.

Unfortunately ABC Berhad has continuously made losses from 1Jan 2007 to 31 December 2007. However, you have no way of knowing this since the information is not made publicly available. Even though you are part owner in ABC Berhad, you are NOT entitled to the management accounts.

On 30 April 2008, you receive the Annual Report of ABC Berhad for the year ended 31 December 2007. The company has suffered huge losses during the year. The share price drops to RM6 per share. You almost get a heart attack and start raving:

What the [insert expletive here]! If only there have provided information on a timelier basis! I would have sold my shares a long time ago.

Fret not! In order to avoid these problems, companies listed on Bursa Malaysia are required to provide quarterly reports, two months after the quarter end. However, these quarterly reports are highly summarized information and they are usually unaudited. This means that the information contained within are usually less reliable than the audited financial statements issued together with the Annual Reports.

Annual and Quarterly Reports of Public Listed Companies are made freely available on Bursa Malaysia. It is important that you familiarize yourself with these reports as they will be foundation for you to base your investment decisions.

I will cover each section in the Audited Financial Statements in detail in my subsequent posts. This will enable us to understand how to assess the performance of the company for the financial year and more importantly, its' financial prospects in the future.


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