Reporting season can be extremely busy with anywhere from 20 to 50 companies reporting on any single day, so for investors it is critical to manage their time efficiently and prioritise what factors to consider in a company’s results announcement. We spend up to five minutes going through each result quickly and outline our process here:
Check the headline numbers
The first thing we do is to check the underlying figures including EBITDA, revenue, EPS and NPAT, and how they compared to our expectations, and the street’s.
We would then dive into further detail in the result over the preceding minutes going towards the outlook statement and also taking a deep dive through the financial statements.
The outlook statement’s probably the most important part of any company's result that we see over the years at Wilson Asset Management with what the company says in terms of whether it be:
- Qualitative commentary around current condition,
- Towards the company or the economy,
- Any quantitative outlook statement,
- Profit guidance for the following 6 or 12 months.
That's generally what investors focus on the most and to us at Wilson Asset Management, one of the most important things that we assess throughout a reporting season.
When we're assessing the company's accounts, the balance sheet’s obviously a heightened level of focus. What we're looking at first of all are debt levels and the company's ability to service that debt.
How we do that is, we generally look at interest cover ratios. It's all well to have high levels of debt as long as the serviceability of that debt is okay. We tend to find that companies with low levels of debt that generate good cash flow tend to perform better over time.
The other things that we focus on are:
- Working capital movements,
- Big debtors, creditors and inventory movements
- Provisions, which are certainly a heightened level of focus for us
Profit and loss
We go through the profit and loss statement really to come to a conclusion as to what the quality of the result is in totality. In terms of the key things that we look at in the profit and loss statement, we're looking at:
- The interest line: so the level of interest that they pay on their debt if there is a debt balance on the balance sheet.
- The tax rate to see if there are any benefits or one-offs in relation to it.
- Write-offs going through the profit and loss statement, which can alter the after-tax figure.
- The revenue line, and reconcile that to the cash flow and try and ensure that there are no one-off revenue benefits, which are inflating or deflating the after-tax profit result.
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Chris is the Chief Investment Officer of Wilson Asset Management, having joined the company in 2006. He is also the Portfolio Manager responsible for WAM Capital (ASX:WAM), WAM Research (ASX:WAX), WAM Active (ASX:WAA) and WAM MicroCap (ASX:WMI).
Personally,...I do it this way, down in this sequence :- 1) DPS 2) EPS 3) Outlook Then I branch out from the above, into matters like one-offs, gearing levels (for REITs and trusts), Net Profit, Number of shares in the mkt.
EV/EBIT is one of the first things I look at. If it is at a level which I like, I will then look further. Strong Balance Sheet is the next issue, then the strength of the company peformance ROA, ROE yadda, yadda!