Reading into a public company’s numbers
This article is part two of a basic review of a public company's financial results and some selected financial ratios that analysts and investors use to assess profitability, suitability, and financial strength.
But first, dear readers, as part of the New Bermuda Investment Primer Launch coming soon, I am inviting all of you to send in your selection of a stock to be included in our new illustrative Bermuda Investment Portfolio – running for six months or more depending upon interest.
Stock choices can be Bermudian-based, local or exempt, foreign companies. Those of you who may be bondholder interested can select a choice as well. Security choices must be publicly traded companies because how else will we know what they are doing?
Selections must be sent to me at email@example.com by April 30, 2019.
The top 20 by selection and number of requests will be included. If the selections are too-biased, for example all tech stocks, I will reallocate to provide a more balanced perspective.
It's been a 15-year lapse since Moneywise featured an illustrative portfolio. Since times and analytical website resources have changed dramatically – links will be provided ongoing throughout these discourses.
Are you ready? Please submit!
The following stock ratios and reviews are a few that I tend to favour when assessing the financial strength of a company such as: liquidity, financial solvency with the view of total debt, return on equity, profitability, and stability of a company's management.
In today's finance world where a tweet, a hack, or a catastrophic organic or mechanical disaster can severely impact a stock valuation in seconds, the ability to smoothly weather these types of over reactive market volatility cannot be underestimated.
Working the numbers
As an introduction to this process, let's review some numbers and financial ratios of the oil and gas integrated energy giant Exxon, which has 71,000 employees worldwide, in the chart shown – a very short five-year summary of financial results balance sheet. The in-depth numbers and financial ratios are found by clicking on the title name on the Wall Street Journal website.
Yahoo! Finance also has an easy-to-understand section on Exxon as well that analyses these main groups: share performance chart from 1962, going from $1.69 per share to $80.67, as of yesterday afternoon; group discussions, statistics, historical data, company profile, financials, analyst opinions, largest stock holders, and sustainability of operations.
Your question immediately is “why are we looking at an American, not a Bermudian, company?”
Two good reasons.
1. Oil is an incredibly important and costly driver of our economy. Bermuda will continue to rely significantly upon its utility and transportation-producing power until renewables are fully integrated within our infrastructure.
2. We are using Yahoo! Finance, Wall Street Journal and a couple of other great financial teaching websites to assist in understanding Exxon's analyses — because the maths work is done for us. See the links below. Bermuda does not yet have such detail in our website resources. When we move on to our reviews of Bermuda companies, we will have to work out the maths for ourselves.
Now, in order not to make your head spin immediately when seeing such large numbers, keep in mind three things:
1. Assets are what the company owns.
2. Liabilities (debt) are what the company owes.
3. Shareholder's equity is the difference of subtracting debt from asset values. In a simplistic illustration, it assumes that in a liquidation all assets are utilized to pay all debts, then the net equity remains.
Liquidity assessment: current ratio is .84 — arrived at by dividing current assets by current liabilities determines if current debts due within one year can be paid from current assets. Not quite.
Total debt to equity ratio is 19.04. This compares total debt to shareholder equity for capital financing and the use of leverage.
Price of shares to book value ratio is 1.51 — an indication of what market investors consider company shares' value to be worth, looking to the future, compared to the actual book value, an accounting measure.
Return on equity of 10.98 is an important indicator for every investor. No point is passing over those dollars for the long term, if the company cannot efficiently generate income from its equity position. This ratio is often used to compare profit performance among companies within the same industries.
Enough for today. We will integrate other ratios and analyst opinions in future discussions.
I'm self-admittedly a conservative financial planner willing to accept a lower security appreciation rate over time in return for less risk. The old saying, “a bird in the hand is worth two in the bush” has not diminished in power.
That perspective means that solid, cash rich, well-established companies with little debt and/or more than adequate financial reserves available to reduce large debt allocations, attract interest. Further, a portfolio that minimises, as best as possible, the volatility and risk elements of single securities and portfolios espouse in the premise of “modern portfolio theory” by Henry Markowitz, written in 1952, is still influentially followed today. This topic will be featured in a future part of the series.
This conservative position does not mean that I recommend the same for everyone. Each of you reading this article, and I hope that you do, will make investment choices based upon sound logic, your age, your financial position, your current savings, future earnings potential, your own ability to tolerate volatility (risk) — that is how much are you willing to accept paper, or unrealised, losses in a down market – without capitulating and selling out, along with other intrinsic valuations relevant to you.
In future articles relating to reviewing company financials, we will discuss cash versus accrual accounting, along with income/profit statements, and other ratios and indicators assisting investors in choosing stock positions.
United States https://finance.yahoo.com/quote/XOM/financials?p=XOM
United Kingdom, also available with UK company focus.
Stock Analysis on Net: https://www.stock-analysis-on.net/NYSE/Company/Exxon-Mobil-Corp/Financial-Statement/Assets
Wall Street Journal https://quotes.wsj.com/XOM/financials
Investopedia: Why Modern Portofolio Theory is Still Hip. https://www.investopedia.com/managing-wealth/modern-portfolio-theory-why-its-still-hip/
• Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette, Bermuda. All proceeds earned from this column go to The Reading Clinic. Contact: firstname.lastname@example.org
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