Clarify the analysis of a financial statement

[Jerome]

This is a very good question because it shows how careful we must be about what we put behind certain terms.

Like the PER, the debt/equity ratio can hide several different definitions.

The most common usage, also put forward by investopedia, is simply total liabilities / total equity.

However, if we stick to the name, we are not talking about liabilities, but about debts. So, and this is also one of the definitions given by Wikipedia, some people use total debt / total equity instead, with total debt = short term debt + long term debt. This is also how I calculate it. FT does the same.

This allows us to focus on what is really debt, namely loans, and not all liabilities.

 

If you use the first definition, a ratio of 2 can be a good guideline. If you use the second, it will be too high, you will have to stick to at least half.

However, we should not be too obsessed with this ratio taken in isolation and above all want to apply it uniformly. It varies greatly depending on the sector and/or capital expenditure. Typically banks, telecoms and the automobile industry are higher.

Debt is not inherently bad. It is a lever, therefore riskier, but potentially also more lucrative. It is rather the use that is made of it that can be bad and the means of the company to ensure the payment of interest.

It's like when you go to the bank, they will ask you for your salary to see if you are able to repay the installments. For this reason I more readily compare the FCF to the debt which gives me an idea of the time needed to repay the latter.

When you value a company you can also use the EV (enterprise value) rather than the capitalization (price), because the EV takes into account the net debt.

[PloutosNX]

Hello Jerome,

If I just interpret "short term debt" and according to investopedia, it is "current liabilities" in the balance sheet.

This brought to my attention something I still can't quite understand, so I'm mixing apples and pears...
This is regarding "Total Revenue", this term is given in two places, once in the "Balance Sheet" under "Liabilities and stockholders' equity -> Liabilities -> Current Liabilities" and in the "Income Statement".
I think I can understand the one in the results as turnover, but in the liabilities, I don't see what it corresponds to and I can't find an explanation, do you have a link, another reference (book) or a simple explanation?

Regarding the ratio, I didn't understand when you said that you have to take half if you use "total debt / total equity" and not "total liabilities / total equity". If I understand correctly, it would be "total liabilities / total equity <= 2" and "total debt / total equity <= 1" (or does the half correspond to 0.5?).
Sorry, this is math quibbling again and my teacher didn't have white hair... he was bald 😛 .

I read that you have to be careful depending on the sector you are analyzing. But I don't have that experience yet to know.

Enterprise value (EV) is not given on Yahoo and MSN, so I think you have to take the definition from investopedia

EV=MC+Total Debt−C

MC=Market capitalization: this is the number of shares in circulation multiplied by the current value of the share
Total debt = sum of “short-term” and “long-term debt”, can I take the same value of “current liabilities”?
C=Cash and cash equivalents; does this just correspond to "Total Cash" given in the "Balance Sheet" or is there a more explicit value to use?

It seems to me that the more I read, the more I ask you questions and the more I try to understand, the less sense all this makes... I suspect that it takes several years to succeed in understanding the subtleties, but I must admit that I think I am not attacking my approach from the right angle to learn how to invest in stocks directly and not follow a tracker.
If you also have any advice or comments regarding your experience, I'm all ears.

Good evening,
Xavier

[Jerome]

If I just interpret "short term debt" and according to investopedia, it is "current liabilities" in the balance sheet.

No. short term debt is Notes payable/short-term debt + Notes payable/short-term debt

current liabilities are all the liabilities, so much more

"Total Revenue", this term is given in two places, once in the "Balance Sheet" under "Liabilities and stockholders' equity -> Liabilities -> Current Liabilities" and in the "Income Statement".
I think I can understand the one in the results as turnover, but in the liabilities, I don't see what it corresponds to and I can't find an explanation, do you have a link, another reference (book) or a simple explanation?

I don't know where you see that. Total revenue is in income statement.

Regarding the ratio, I didn't understand when you said that you have to take half if you use "total debt / total equity" and not "total liabilities / total equity". If I understand correctly, it would be "total liabilities / total equity <= 2" and "total debt / total equity <= 1" (or does the half correspond to 0.5?).

Again, because total liabilities is much larger than total debt. So if you choose the first one, you can use as benchmark 2. If you use the second one, rather 0.8. I prefer the second one, but again, it's just a benchmark. This ratio doesn't mean anything on its own.

EV=MC+Total Debt−C

Yes

MC=Market capitalization: this is the number of shares in circulation multiplied by the current value of the share

Yes

Total debt = sum of “short-term” and “long-term debt”, can I take the same value of “current liabilities”?

again no

C=Cash and cash equivalents; this just corresponds to “Total Cash” given in the “Balance Sheet”

Yes

It seems to me that the more I read, the more I ask you questions and the more I try to understand, the less sense all this makes... I suspect that it takes several years to succeed in understanding the subtleties, but I must admit that I think I am not attacking my approach from the right angle to learn how to invest in stocks directly and not follow a tracker.

That's normal. You overcomplicate, you theorize too much and you don't practice enough. I've told you this in the past. You have to stick to a few factual elements that you understand and are comfortable with, and then you have to get started. That's where you'll understand what's behind the theory. Concepts are good, they give you a basis, but they're only useful if you can apply them. You mustn't be afraid of making mistakes, you have to experiment, that's how it sinks in. By dint of looking too much for the ultimate detail, you lose sight of the essential. Which is essentially buying cheap, a stock that isn't a falling knife and that is of quality. So one or two valuation ratios, looking at the trend and following the evolution of earnings and FCF. Just do that and it's already much better than all those who buy ETFs.

When you have more practice and money, you can subscribe to a premium service and you will have figures that hold up better. On the contrary, at worst, if you do not want to take the head, well, you still have ETFs. To start, it is not so bad. It gives you diversification at a low price.

[PloutosNX]

Hello Jerome,

Regarding the "short term debt" (or Notes payable), Yahoo does not seem to give this value. Do you have all this information on FT?

Both "Total Revenue" are at Yahoo. I tried to add images to this post to make it more visual, but there is no way.

These two values can be found at Yahoo (in English)

1) Financials->Income Statement->Breakdown->Total Revenue
2) Financials->Balance Sheet->Breakdown->Liabilities and stockholders' equity->Liabilities->Current Liabilities->Total Revenue

I hope you can still easily locate them.

I try to apply, but unfortunately since there is (almost?) nothing at a correct value, I prefer to continue digging and theorizing. If I had to limit myself to a few factual elements that I understand in a fundamental analysis, it risks tending towards 0…

I'll try to focus on what you wrote, find cheap titles.
What ratio do you recommend to start with? I would have said the PER, the current ratio and the payout ratio.
I haven't looked into FCF yet, but it can vary greatly from year to year. The main point is that it's always positive, or should it be compared to debt instead?

Which premium service do you recommend between FT, Yahoo, etc.? To echo your remark, what I really lack is practice. I have limited myself for the moment to ETFs and actively managed funds, until now I trust my entourage working for wealth management, but no one is eternal and I will no longer be able to have access to this type of fund. This is why I am really interested in understanding the subject in more detail and delving deeper in order to be able to manage my assets independently.

Thank you for all your advice and what you have already given me.

Good day,
Xavier

PS: I just have a remark, because I had read that you are not interested in cryptocurrencies and their spheres. Everyone sees the price and the speculative value, but can understand the technology and what it brings and the revolution that we can foresee (think of the Internet in the years 1995-2000).
I read that in the 2000s you were a fervent anti-GOLD "rebel" as well, but that since then you have watered down your wine and revised your judgment. Find out about the "tokenization" of assets (Security Token), imagine no longer being dependent on a bank to store your shares, but that you would be the sole master of your investments.

[Jerome]

Okay, I see. Again, don't mix apples and pears. Revenue = turnover, it's in Income statement.

What Yahoo calls "total revenue" (I don't know why, it just confuses things), is actually short term debt (short term debt / notes payable)

Then another peculiarity: Yahoo reports an apparently incomplete figure for long term debt. It includes Long-term loans payable, but it is missing Lease obligations (as in FT). I am not an accountant, but I can understand that a lease contract is considered a long-term commitment, so I assume FT is correct.

See details here:

https://www.kaijinet.com/jpexpress/Default.aspx?f=company&cf=financial_statement&cc=1736

for valuation take P/S or P/FCF and P/B

PER or dividend yield only if you are targeting big caps, but I advise against it at the moment, everything is too expensive

current ratio and payout ratio are not indicators of valuation but of quality.

For now you don't need a premium service. Stick to the basic numbers.

Gold: I watered down my wine, but I only have 5%.

cryptocurrencies: I don't understand. So I don't touch. And we don't have enough perspective on this...

 

[PloutosNX]

Hello Jerome,

Thanks for the clarification and finally I understood this total income at Yahoo... another pear trying to pass itself off as an apple!

Good day,
Xavier

[PloutosNX]

Hello Jerome,

Sorry to ask for your help again, but I have a doubt about the following point.

When talking about profit (and stability or growth of results), what value should be used? I have not found any comments regarding our previous discussions.
I have these 5 possibilities in Income:

– Gross Profit / Gross Profit
– Operating Income or Loss
– Net profit / Net Income
– Net income available to common shareholders
– EBITDA

In my understanding, you have to use either the "Net Income available to common shareholders", because that is really what can be used for shareholders, or the EBITDA which represents the "health of the company".

Would you have a light to guide me?

Good day,
Xavier

[Jerome]

It depends on what you want to do with it. It's like asking me whether it's better to buy beef tenderloin or rib steak.

EBIT and EBITDA are good for comparing valuations

EPS is good for seeing the evolution and comparing to the dividend.

[PloutosNX]

Good evening Jerome,

Thank you for your reply.

OK for the EPS value (if it is Earnings Per Share) and it must be compared to Net Income available to common shareholders. Is this also the growth of results defined by B. Graham?

But if I only want to see the stability of profits (as advocated by B. Graham), what is the most correct value to use compared to those cited previously?
– Gross Profit / Gross Profit
– Operating Income or Loss
– Net profit / Net Income
– Net income available to common shareholders
– EBITDA

EBIT (EBIT: Earnings Before Interest and Taxes) can be calculated with "Net Income + Interest + Taxes", which corresponds to the value of "Income Before Tax + Interest Expense" at Yahoo I think, is my reasoning correct?

I'm trying to understand the basics, but unfortunately I haven't found any work that allows me to link these concepts to the names given in Yahoo/MSN's financial statements.

Good evening and thanks again for your help Jérôme,
Xavier

[Jerome]

For stability as mentioned I look at EPS. You can also look at net profit. But I prefer EPS because if the company increases its profit by 10% and at the same time it increases its shares by 20%….

for EBIT your reasoning is correct

you're starting to get there 😉

happy holidays

[PloutosNX]

Hello Jerome,

We agree that the value of EPS will be very small (Otec 2019 EPS = 0.22) and that we must compare its percentage increase/decrease for each year?

I still have some basic interpretation problems with some results. The values are for the company Otec and the year 2019.

I have a factor of 100 difference for the Price to Book.
Price to book = Last Close / (Total stockholders' equity / Shares Outstanding) = 2465 / (14,108,354 / 5.2m) = 908 and I should have a value of 0.9 instead, right?
Do you see a big mistake?

How to calculate Earnings per share correctly?

Total stockholders' equity / Shares Outstanding
OR
(Net Income – Dividends) / Shares Outstanding

Because the dividend is so low compared to the value of the Net Income that I don't see the point in subtracting it. Should we use the dividend value multiplied by the number of shares?

We discussed Enterprise Value and how to calculate it, but the results obtained seem strange to me.

Here is a reminder EV=MC+Total Debt−C
MC: 12.8 billion JPY
Short term debt: 1039.8 million JPY
Long term debt: 36.99 million JPY
Cash: 7000.9 million JPY

EV = 12.8 billion JPY, so if we ignore the small variations (500 million), we have the same value as the MC. Does this mean that the company is correctly valued?

It would be better to use the latest values instead of the financial year ending March 2019?

One last question to make sure we don't make a big mistake when calculating the Price to Sales.
Price to Sales = Last Stock Price / (Total Revenue / Shares Outstanding), is this correct?

However for Otec, I get a value of 537.5, which seems wrong to me, do you have an explanation? (the Sales per Share I get 4.6)

Have a nice end of the day and happy holidays too.
Xavier

[PloutosNX]

Good evening Jerome,

!!!ATTENTION!!! Since I can't edit my previous post.

The previous message has errors in the calculations, because YAHOO gives the values in thousands and I took them as tens!!! MSN gives them in millions by the way.

Price to book is OK with 0.9.

EPS with a value of 223 JPY is low, but it may be correct in my opinion.

EV I have a value of 6.8 billion, so almost half of the market CAP. How can I interpret this? Is the stock overvalued?

Price to Sales at 0.54, this is more correct and with a Sales per Share of 4585JPY.

Sorry for the wrong values above. I had searched on Yahoo where the coefficient was, but never found it, so I had deduced that it was "raw".

Good evening,
Xavier

[Jerome]

You're just right

No, the stock is not overvalued, quite the contrary.

Look what the EV formula tells you: there's a ton of cash and very little debt.

This is already a very good thing, but on its own it means nothing, you have to compare it to a fundamental (like FCF or EBIT/DA, as you would do for the price).

[PloutosNX]

Hello Jerome,

I looked at these last few stocks that matched certain criteria, but there's nothing that looks correct.

I just reread your last post and I can't understand what you mean by comparing EV with FCF or EBIT/DA.

Cash is almost half of the tangible book value, so there should be no liquidity problem.

The EV is about 6.5 times FCF and 3.8 times EBITDA, but how to interpret this?

Good evening,
Xavier

[Jerome]

indeed the liquidity is comfortable (current ratio of 2)

EV/FCF is a distant cousin of P/E, better in the numerator and denominator, so with a value of 7 it is very interesting (anything below 10 is interesting)

same for EV/EBITDA, below 10 it's good

normally we take the inverse value EBITDA/EV in % (I have 23% for Otec)

anything above 10% is good

[Author]

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