There are two company reporting seasons in Australia each year, in February and August. Around 190 of the top 200 companies will report in the space of three weeks, producing an avalanche of information. Despite the high volume, its important investors hear what the market is saying – not just for the stocks they hold, but for the wider picture of the economy reporting season delivers.
Yearly and semi-annual reporting gives investors a snapshot of their company at the reporting date. The health, or otherwise, of a company is laid bare. Investors who know what to look for can glean information that keeps them in a stock, or moves them to sell. What are the key measures investors should look for in a company report?
The surest predictor of a rising share price is increasing earnings. If estimates of earnings are going up, so too normally are the shares. So the first take on any company report is the profit line. Is the company making money? Did it make more or less than last year? At what rate are profits growing? It’s also important to understand why a company is generating more or less profit. Is it due to one-off cost-cutting, or are sales up?
Free Cash Flow
Free cash flow is a good indicator of what’s really occurring in a business. There is no right or wrong to FCF. Sometimes, a business should be investing, at others it should be generating cash. A look at the FCF can determine if the management story is matched by the business operations.
Strong free cash flow is a positive sign, but may also mean the business is maturing and/or is lacking in investment opportunities.
Other important measures
The goods on hand a company holds should vary over the cycle, but the changes in inventory from one semi or annual report to the next can illustrate what’s going on at the operational level of the company. Once again, a change in the level of inventories is not in itself a positive or negative. Understanding why inventory levels are changing informs investors.
A company’s receivables speak not only to the health of the company, but also to the state of its customers. The shares on issue determine the slice of the pie each investor receives. Any changes via buyback or issue to company officers or external parties change the calculation for each shareholder, and any significant changes should be fully explained. The dividend also requires examination. Increasing or decreasing? Why?
Lastly, investors should examine any outlook statements from the Chair and CEO. These are the experts in their respective industries. While experts are not always right, their views on what are the most important issues and how they may pan out are useful to investors in forming a view.