Results: How to crunch numbers

Some investors find a balance sheet as comprehensible as Swahili. Photo / Richard Robinson

As the reporting season hits its stride, investors receive a slew of information detailing the financial health of the companies they hold a stake in.

In among the reams of numbers are the nuggets of information that investors need to ensure they are up with the play.

While some investors might find a balance sheet as comprehensible as Swahili, Hamilton Hinden Greene client adviser James Smalley said to treat company results like you would your own personal finances.

He advises investors to look at the operating cash flow - in basic terms, how much money is coming in versus how much is going out as expenses.

Craigs Investment Partners research analyst Michelle Perkins said the operating cash flow was unlikely to be disclosed in the press release that accompanies the results announcement, so people would need to go to the financials.

Like household finances, investors needed to check how much debt the company had and its ability to service that debt.

High debt levels don't necessarily indicate a problem, but Smalley said those companies needed to have strong cash flows to cover interest or debt repayment.

"The nightmare scenario is a highly geared company with negative operating cash flow. Normally it means they could be going to the wall," he said.

Perkins said there were different ways to work out the company's level of gearing, but the most widely used was the ratio of net debt - the total of short and long-term debt, less cash - to either the company's assets or equity.

The annual report, which is available in the weeks following a full-year results announcement, contains more detail on debt levels at the company, including when debt needs to be repaid and how much needs to be paid within 12 months (current liability).

Perkins also advises investors to check whether revenue growth - often referred to as the top line growth - has filtered down to the bottom line, or profit line.

"If they've grown their revenue by 10 per cent, have they grown their net profit by 10 per cent or has it grown by more? If it hasn't grown by much, then what is happening with the business?"

Perkins said the lower growth in the profit line could signal issues such as a cost blow-out.

She said any earnings growth should be reflected in a growth in earnings to the investor, either through share price rises or dividends growth.

Smalley said the dividend sent a strong signal to the market. An increase in the dividend payout meant a company was feeling confident about its future prospects.

A cut was a sign that things were not well or as good as previous years.

Perkins said the average investor did not need to be a financial whiz but did need to understand how to calculate the financial ratios.

She recommends taking questions on the company to its annual general meeting, because unlike analysts, this may be the only opportunity shareholders have to speak to the board and management team.

Smalley said it could require a bit of digging to get the relevant figures but would take only five or 10 minutes once you got the hang of it.

He said the requirement for continuous disclosure meant the days of surprise bottom line announcements were gone, so investors needed to look at what comments management were making about the market and the future prospects of the business.

"The management guidance is almost as important as the result itself. The market looks forward six months so that guidance gives the market that cue on whether they are going to keep improving or things are going to deteriorate."

ALWAYS CHECK
* Cashflow
* Debt
* Management guidance
* Dividends