Clarify the analysis of a financial statement

[PloutosNX]

Good morning,

I will try to go over point by point the useful data for selecting a title.
I will base myself on the defensive investment described by Benjamin Graham in his book The Intelligent Investor to begin with. I will then supplement with different ratios and ideas from our host Jerome.

The base stock to analyze is the company Otec Corp.
Here are the links to Yahoo and MSN in both languages
Yahoo EN https://finance.yahoo.com/quote/1736.T?p=1736.T
Yahoo FR https://fr.finance.yahoo.com/quote/1736.T?p=1736.T
MSN EN https://www.msn.com/en-us/money/stockdetails/tks-1736/fi-a9aslh
MSN FR https://www.msn.com/fr-ch/finance/details-de-l-action/tks-1736/fi-a9aslh

My main concern is reading financial reports and being able to link the correct terms with their usage.

I will split this into several messages to make it more readable.
I hope this will be useful to other people as well.

Xavier

[PloutosNX]

Here are the 6 points given by Benjamin Graham.

1) Size    
    Turnover: 100 million
    
2) Financial situation    
    Current assets = 2* Current liabilities
    Long term debt = maximum working capital requirement

    Max debt = 2*equity
    
3) Profit stability    
    Positive result (25 years)
    
4) Dividend statistics    
    Continuous payment (10 years)
    Growing dividends (according to Jerome)
    
5) Growth of results    
    Earnings per share growth min 1/3 over 10 years (calculated as 3-year average for start and end)
    
6) Moderate price/profit ratio
    Max current price = 15*average profit of the last 3 years

[PloutosNX]

Here is a glossary to start with to link the terms used in the book and their connection to Yahoo/MSN.
    
Turnover:
Are we talking about the total turnover for a year?
    Yahoo FR: Total turnover
    Yahoo EN: Total revenue
    MSN FR: Total income
    MSN EN: Total revenue

Current assets:
Is this the total current assets?
    Yahoo FR: Total current assets
    Yahoo EN: Total current assets
    MSN FR: Current assets
    MSN EN: Current assets

Current liabilities:
Is this also short term liabilities?
    Yahoo FR: Total current liabilities
    Yahoo EN: Total Current Liabilities
    MSN FR: Total current liabilities
    MSN EN: Total Current Liabilities

Current liabilities
Is this also short term liabilities?
    Yahoo FR: Total current liabilities
    Yahoo EN: Total Current Liabilities
    MSN FR: Total current liabilities
    MSN EN: Total Current Liabilities

Long term debt
    Yahoo FR: Long-term debt
    Yahoo EN: Long Term Debt
    MSN FR: Long-term debt
    MSN EN: Long Term Debt

Working capital requirement:
This is the difference between "Current Assets" and "Current Liabilities", is that right?

Equity:
Are these values correct or should we use "Capital Stock" - at MSN - and "Common Stock" at Yahoo?
    Yahoo FR: Total Equity
    Yahoo EN: Total stockholders' equity
    MSN FR: Total equity
    MSN EN: Total Equity

Profit stability:
A value that is difficult to obtain without subscribing to the various sites mentioned or is there another that would be usable for this?

Dividend statistics:
Same remark as before.

Growth of results:
Should we use turnover or operating profit/loss or some other value?
    Yahoo FR: *To be edited*
    Yahoo EN: *To be edited*
    MSN FR: *To be edited*
    MSN EN: *To be edited*

Course / Moderate Profit Ratio
This is our famous PER / PE Ratio? The different sites give us the TTM (value calculated on the average of the last 12 months). It should therefore be recalculated with the average profit, but to do this we use the "Net profit" (Net profit available to ordinary shareholders - (name according to Yahoo))?

This is it for this first approach. I will continue depending on the corrections made to this first research.

Sincerely,
Xavier

[Jerome]

Hi Xavier,

I'll start with a quick comment on the 6 points you list from Graham:

Here are the 6 points given by Benjamin Graham.

1) Size
Turnover: 100 million

This is to ensure the liquidity of the stock. On the other hand, research gives a certain advantage to small caps, and in particular to micro caps. The latter have the particularity of being difficult to trade by institutions, so in this category (and it is the only one), small investors have an advantage.

2) Financial situation
Current assets = 2* Current liabilities

=> on the other hand, companies that have too much cash seem to underperform (which is explained by the fact that they have money lying idle and not being used for the development of the company)

3) Profit stability
Positive result (25 years)

I no longer remember that Graham was asking for 25 years of positive results! I was thinking five. That seems extreme to me. Profits are by nature very inconsistent. Personally, I am very happy with a positive profit and if possible increasing over 5 years.

4) Dividend statistics
Continuous payment (10 years)
Growing dividends (according to Jerome)

Nothing to complain about, research (Ned Davis) has proven the validity of dividends, especially if they are increasing.

5) Growth of results
Earnings per share growth min 1/3 over 10 years (calculated as 3-year average for start and end)

same remark as in point 3. Also be careful not to focus too much only on profit, but also (and above all) on free cash flow.

6) Moderate price/profit ratio
Max current price = 15*average profit of the last 3 years

I also seem to have read that Graham was more interested in the last five years. In any case, I think it is indeed good not to focus on current profit, but rather the average, again because profits vary a lot from one year to the next.

In your list there are still other criteria dear to Graham like the Price to book (or even the price to tangible book). For deep values, he was also a big fan of the NCAV (net current asset value) and the NNWC (net net working capital).

 

[Jerome]

following :

Turnover:
Are we talking about the total turnover for a year? Yes.

Current assets:
Is this the total current assets? yes

Current liabilities:
Is this also short term liabilities? yes
precision: the current ratio (or general liquidity ratio) = ratio between current assets and current liabilities (this is where Graham says it must be greater than 2)

 

Working capital requirement:
This is the difference between "Current Assets" and "Current Liabilities", is that right?

yes it is working capital in English… clearer

 

Equity:
Are these values correct or should we use "Capital Stock" (at MSN) and "Common Stock" (at Yahoo)? Equity. What you put below is correct:
Yahoo FR: Total Equity
Yahoo EN: Total stockholders' equity
MSN FR: Total equity
MSN EN: Total Equity

Profit stability:
A value that is difficult to obtain without subscribing to the various sites mentioned or is there another that would be usable for this?

you can find it for free on Yahoo / financial / income statement, but not for 20 years obviously

Dividend statistics:
Same remark as before.

you find the dividend history on yahoo, historical data, show dividends only

Growth of results:
Should we use turnover or operating profit/loss or another value? Net profit in principle, or even EBIT?

Course / Moderate Profit Ratio
This is our famous PER/PE Ration? Yes

The different sites give us the TTM (value calculated on the average of the last 12 months). It should therefore be recalculated with the average profit, but to do this we use the "Net profit" (Net profit available to ordinary shareholders - (name according to Yahoo))? yes, even if I personally prefer to use the net income before extra items (what I call recurring profit). This avoids being polluted by extraordinary elements which would artificially distort the ratio upwards or downwards.

 

[PloutosNX]

Hello Jerome,

Thank you for your comments.

I will continue my research for the lexicon by integrating what you write on the site and supplementing it with your remarks above.

Happy Sunday,
Xavier

[PloutosNX]

Hello Jerome,

But after rereading your response I have a few points to clarify before going into your comments further.

Free cash flow
You mention "Free Cash Flow", I was able to find a value on MSN, but Yahoo does not give it directly. One of your articles mentions "Operating Cash Flow minus Capital Expenditures". The total value of the Operating CFF is given at Yahoo as "Total Cash Flow From Operating Activities", but I can't figure out what capital expenditures this refers to.
I also noticed a big difference between MSN and Yahooo for the value of "Net income" (Yahoo – https://finance.yahoo.com/quote/1736.T/cash-flow?p=1736.T ) (MSN – https://www.msn.com/en-us/money/stockdetails/financials/tks-1736/fi-a9aslh ), do you have an opinion on this?

Price to book
It is the price / book value, so we are talking about the current price of the share or should we use the Market CAP? The book value I think is the value of the "Current Assets"?
Is the value given by Yahoo or MSN sufficient (it's the MRQ one, so the last quarter) or should we do a longer period, or an average or even per year and see its evolution?
I read in one of your articles that you prefer to use "tangible book value", what do you use as a value? I found on MSN the value "Net Property, Plant, and Equipment", but I think you also have to take into account inventory and other assets?

Price to tangible book
Here I have more difficulty finding the representation, but I think that we must use the value of Yahoo Intangible Assets. An additional question concerning the number of shares in circulation (Shares Outstanding), or do you take the value, because between Yhaoo and MSN there is a difference of almost 500 thousand! (Y:5.25Mio and MSN:5.7Mio)

EBIT / EBITDA
You mention these two abbreviations regarding Results Growth.
An EBITDA value is given at Yahoo, I think it is still the current value.
Could you tell me what method you use to calculate them? There is certainly a better way to do it than using the normal definition.
Do you only analyze the current or also the past or the average?

Net income before extra items
Yahoo and MSN don't give it directly? Do you get it elsewhere or is there an indirect way to calculate it?

My last question is about the dividend history at Yahoo, if I take the value given in "Historical data -> show dividends only", I have a value of 65 for the last of 2019 and if I look on the main summary page I have the value of 130 for the future, so this is already a forecast, but based on what?

Good day,
Xavier

[Jerome]

Hi Xavier,

Here are my answers:

free cash flow = operating cash flow – capital expenditure

operational cash flow = Cash Flow From Operating Activities »

capital expenditures = capital expenditures or Purchase of property plant, and equipment (PP&E) (as reported at Yahoo and MSN)

 

I also noticed a big difference between MSN and Yahooo for the value of "Net income" (Yahoo - https://finance.yahoo.com/quote/1736.T/cash-flow?p=1736.T ) (MSN - https://www.msn.com/en-us/money/stockdetails/financials/tks-1736/fi-a9aslh ), do you have an opinion on this?

I see the same values for me... be careful not to compare the "income statement" with the "cash flow statement" because on the latter income = EBIT (before taxes)

 

Price to book

you have to divide total stockholders equity by the number of shares, to get the book per share,

then divide the course by the book per share

The book value I think is the value of the “Current Assets”?

No, not al all

Is the value given by Yahoo or MSN sufficient (it's the MRQ one, so the last quarter) or should we do a longer period, or an average or even per year and see its evolution?

This value, unlike profits or cash flow, is rather stable over time, so there is no need to use an average, but on the contrary the last known value. Personally, I use the last financial year.

I read in one of your articles that you prefer to use "tangible book value", what do you use as a value? I found on MSN the value "Net Property, Plant, and Equipment", but I think you also have to take into account inventory and other assets?

you take total equity and you remove goodwill and intangibles

Price to tangible book

you take the tangible book value and divide by the number of shares, that gives you the tangible book per share

then you divide the price by this number

There I have more difficulty finding the representation, but I think we must use the value of Yahoo Intangible Assets.

No, not al all

One more question regarding the number of shares outstanding (Shares Outstanding), or do you take the value, because between Yhaoo and MSN there is a difference of almost 500 thousand! (Y:5.25Mio and MSN:5.7Mio)

I didn't find anything on yahoo and I found 5.2 on MSN, this last value is correct

you have to look under balance sheet

EBIT / EBITDA
You mention these two abbreviations regarding Results Growth.
An EBITDA value is given at Yahoo, I think it is still the current value.
Could you tell me what method you use to calculate them? There is certainly a better way to do it than using the normal definition.
Do you only analyze the current or also the past or the average?

EBIT: Operating Income

EBITDA = Operating Income + Depreciation/amortization (not indicated under its two sites)

but you can use EBITA it works very well too and most of the time the values are similar

 

Net income before extra items
Yahoo and MSN don't give it directly? Do you get it elsewhere or is there an indirect way to calculate it?

I can't find it on these sites either, the idea is to not take into account exceptional profits/losses

 

My last question is about the dividend history at Yahoo, if I take the value given in "Historical data -> show dividends only", I have a value of 65 for the last of 2019 and if I look on the main summary page I have the value of 130 for the future, so this is already a forecast, but based on what?

This seems more like a Yahoo bug to me, it happens quite often with them. They probably doubled the dividend thinking it was paid 2x per year.

[PloutosNX]

Hello Jerome,

Thank you for your reply.
I realize I mixed some sections between MSN - Yahoo and took the wrong values. Sorry for this!

I still have some points that make me doubt your remarks.

Free Cash Flow
FORMULA: free cash flow = operating cash flow – capital expenditure

Example for Otec Corp, the capital expenditure is negative, so I have to do a "standard" arithmetic operation (--=+) or is it always a subtraction equals whether the capital expenditure value is positive or negative?

We agree that "Total stockholders' equity" and "Total Equity" are synonyms?

I found in Yahoo the number of shares outstanding on the "Statistics" page (value 5.25M) and on MSN in "Summary" (value 5.7M). It is strange that in MSN under "Balance sheet" the value of "Ordinary Shares Outstanding" is different. Maybe there is a difference between previous years and the current one?

You mention EBITA, is that a typo I guess? Yahoo gives EBITDA (under Financial -> Income Statement) and MSN Operating Income (so EBIT if I understood correctly) under (Financials -> Income Statement). This allows you to have both values if needed.

Net income before extra items
You use FT (with a subscription) to get all this information, is that right?
But I think I can be satisfied for the moment with just the value of the Moderate Profit (average profit calculated with the "Net Income available to common shareholders" over the last 4-5 years)

Good day,
Xavier

[Jerome]

Example for Otec Corp, the capital expenditure is negative, so I have to do a "standard" arithmetic operation (--=+) or is it always a subtraction equals whether the capital expenditure value is positive or negative?

you "add" the negative value

We agree that "Total stockholders' equity" and "Total Equity" are synonyms?

Yes

I found in Yahoo the number of shares outstanding on the "Statistics" page (value 5.25M) and on MSN in "Summary" (value 5.7M). It is strange that in MSN under "Balance sheet" the value of "Ordinary Shares Outstanding" is different. Maybe there is a difference between previous years and the current one?

ok, yes, obviously there is an increase in the number of shares to 5.7 in the current financial year. The important thing is to compare like with like, i.e. data between them over the same period (e.g. profit of the last financial year by the number of shares of the last financial year to obtain the earnings per share)

 

You mention EBITA, that's a typo I guess?

yes sorry, written hastily

Net income before extra items
You use FT (with a subscription) to get all this information, is that right?
But I think I can be satisfied for the moment with just the value of the Moderate Profit (average profit calculated with the "Net Income available to common shareholders" over the last 4-5 years)

yes i use FT with ab

yes you can use this, or also EBIT or EBITDA which do not include exceptional profits/losses

it all depends on what you want to do... i would say that if it is to compare valuations these last two are much better than the last net profit, but that by using the average of the net profits you are not too bad either

[PloutosNX]

Hello Jerome,

Free Cash Flow
I think that with an example it will be simpler and clearer.
Otec Corporation Company (1736.T) year 2019 – https://finance.yahoo.com/quote/1736.T/cash-flow?p=1736.T / https://finance.yahoo.com/quote/1736.T/balance-sheet?p=1736.T

I realize that my problem comes from two values with almost the same designation on Yahoo, but once in the Balance Sheet and in the second case in the Cash Flow… and also from the formula you give by subtracting capital expenditures. If I consider that an expense is negative in a balance sheet, I have to add it.

Cash Flow From Operating Activities: 1,170,002 JPY
Property, plant and equipment: 1,770,084 JPY (https://finance.yahoo.com/quote/1736.T/balance-sheet?p=1736.T)
Investments in property, plant and equipment: -133,673 JPY (https://finance.yahoo.com/quote/1736.T/cash-flow?p=1736.T)

This is what I would take to calculate FCF, is this correct?

Free Cash Flow = Cash Flow From Operating Activities + Investments in property, plant and equipment
1,170,002 + 133,673 = 1,036,329 JPY

Regarding the increase in the number of shares, is this a problem for the fundamental and long-term analysis of the Otec Corporation that you had done or are the 500 thousand new shares negligible (it is almost 10%)?

I will try to make a "diagram" to connect the different points to allow me to say whether or not an action would be interesting.

I will definitely get back to you for your opinion if you don't mind.

Good day,
Xavier

[Jerome]

I realize that my problem comes from two values with almost the same designation on Yahoo, but found once in the Balance Sheet and in the second case in the Cash-flow…

As already said, be careful not to mix these two tables, otherwise you are comparing apples and pears (or rather a state with a variation). "PPE" in balance statement is a state, "Investing in PPE" is a variation.

 and also the formula you give by subtracting capital expenditures. If I consider that an expenditure is negative in a balance sheet, I have to add it

yes we play on words, you deduct the expense (which is a positive number) or you add the negative value which is indicated in the flow

Free Cash Flow = Cash Flow From Operating Activities + Investments in property, plant and equipment
1,170,002 + 133,673 = 1,036,329 JPY

correct result but wrong formula 😉 once again we are playing on words, the main thing is that you understood

I now notice that on the yahoo cash flow page that you indicate above, everything is indicated at the bottom: operational cash flow, capital expenditure and free cash flow… simpler!

Regarding the increase in the number of shares, is this a problem for the fundamental and long-term analysis of the Otec Corporation that you had done or are the 500 thousand new shares negligible (it is almost 10%)?

Same comment as before, we should not compare apples and pears. You are talking about the current financial year. Yes, 10% is a significant increase in the number of shares, but we must take the overall picture. However, my analysis was based on the last closed financial year (more reliable values), with all the fundamentals of this financial year, including the number of shares. If during the current financial year the number of shares has increased, then yes, it is bad news, but what about the rest? in the first half of 2019, compared to the previous year, sales increased by 23% and net profit by 134%…

So I think we're still not doing too badly with Otec 😉

 

[PloutosNX]

Hello Jerome,

I need to better understand the differences between the values in the Balance Statement table and the Cash Flow table.

Regarding the calculations and playing on words, you are right. But how many errors due to a false interpretation result from it… I did not understand why you say that the “formula is wrong” and the result just to calculate the Free Cash Flow? (it is just this: Free Cash Flow = Cash Flow From Operating Activities + Investments in property, plant and equipment?)
Yahoo gives the value directly, that's right, but it's always better to understand what's behind it and also to be able to calculate it in case it is no longer given.

Ok regarding the number of shares (and this must be valid in all cases), we must always compare with the values of the year for which we make the calculations if I understand correctly. I just have a small problem when using average as we discussed previously. I will have to look into it, but this is detail and I am not as far in my research to be able to select good companies.

Have a nice end of the day,
Xavier

[Jerome]

However, I did not understand why you say that the "formula is wrong" and the result is correct for calculating the Free Cash Flow?

you wrote:

1,170,002 + 133,673 = 1,036,329 JPY

your math teacher would have white hair 😉

Yahoo gives the value directly, that's right, but it's always better to understand what's behind it and also to be able to calculate it in case it is no longer given.

you are preaching to the converted!

[PloutosNX]

Hello Jerome,

I'm trying to make progress on my diagram and schema of value investing and growing dividends, but some of the details are still a little fuzzy.

I had read that a company should not have a maximum debt greater than twice its equity.

Max debt = 2*equity

But I have doubts about the understanding of maximum debt.
In your opinion, is it just long term debt or total liabilities or just long term liabilities (at Yahoo Total non-current liabilities)?

I also read that the light at the end of the tunnel of financial independence is getting brighter, I'm happy for you!

Good day,
Xavier

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