What I look for when reading a Results Statement - Part 1 of 3

Tweet

If you follow me on the Tweet Machine you have probably noticed by now that every morning from just after 8am I am looking through the RNS News Feed for the Day (which I usually find on Investegate or if that is playing up I go to the LSE RNS Feed), and first off I am looking for Stocks I hold and any News they have put out. 

Before this I usually grab my Mobile Fone where I use the ADVFN App and even bang on 8am there are movements on some of my Stocks and if I know one of them is due to put out a Trading Statement or a Results Statement, then I use the App to have a quick look at the Headlines or perhaps the full Statement if it is just a quick Trading Update. The ADVFN App is superb and an easy way to track your Stocks and you can set up Watchlists and all that for Stocks you don’t hold and of course it works on Tablets and stuff. I also use it to see what the Indexes are doing but unfortunately there is a 15 minute delay on the FREE version but I do find that the Intraday Charts it shows do seem to be pretty near Real-time.

The App is FREE and you can find out more about it in this Blog I wrote a while back:

http://wheeliedealer.weebly.com/educational-blogs/reporting-end-of-day-numbers-and-the-advfn-app

Apart from this quick look at my Fone, I then switch to an ancient 7 inch Tablet (this thing is amazing - it is cracked and battered and I managed to drop it again a couple of Weeks ago and I think the only thing keeping the Screen together now is the plastic Screen Protector that I put on it and apart from a couple of areas I can actually read stuff on the Screen. Having said that, it is getting a bit silly as the Charging Socket is playing up as well now and without doubt I need to get a grip and buy a new one (they are dirt cheap these days). This one was a Chinese cheapie that I bought when they first came out but it has been incredibly good and I even dropped it so badly once that the top and bottom came apart and the 2 parts were only held together by one thin wire !! The other surprise is that even after all these years the battery still charges up and holds its charge very well.

When I look through the RNS Feed and see Results or a Trading Update from one of my Stocks (or perhaps a headline for one of my Stocks which looks like it might be ‘market moving’), I click on that item and read carefully and slowly through it (there are loads of nonsense RNSs that come out like many of the ‘Holdings in Company‘ ones where the situation has barely changed or ‘Price Monitoring Extension‘ and stuff like that. After a while you learn which to take little notice of or to leave initially and then look at them later. In an ideal world I would do this from 7am because the Market opens at 8am but I find in practice that if a Stock puts out a Profit Warning, you need to be like a rocket to get your Stock sold at a decent Price and 9 times out of 10 the Stock has already tanked so it makes little difference if I try to sell at 8.30am or 8.02am. I also prefer to think about these things for longer and I mean days rather than hours and I never like making quick, snap, Decisions.

While on this subject I will just mention something that the legend ‘Cockney Rebel’ @RebelHQ said on a Tweet to me the other day where he has sometimes held a Stock that has a Warning and then bought more when the Price collapses and then sold out soon afterwards. This gets rid of the troubled Stock and reduces his loss because he is in effect Averaging Down and taking advantage of the extreme moves you can often get earlier in the Day before the Price recovers a bit. It is obviously high risk so you need to be careful doing this sort of thing.

It tends to be the case that Trading Statements are often very brief and don’t include much Information to be interpreted and for this reason I will write in this Blog now about the approach I take to reading through a full Results Statement (usually these are Interim, 6 Month, Statements or Full Year Statements but some Stocks put out a lot of detail in their Quarterly Updates - but that is normally the huge FTSE100 Stocks in the main.) If I outline what I do for Results Statements then interpreting a Trading Statement will follow similar lines but be far easier and quicker.

It is pretty much always the case that the top of a Results Statement has a list of Headline Financial Numbers and some sort of comparison with the previous Year or perhaps the previous equivalent Trading Period for the Year before or the most recent previous Trading Period (last Quarter or something) and many combinations of the above !! Anyway, the point here is that you need to slowly work through each bit and try to figure out what is going on. 

So, for example, it usually starts on the Revenue (sometimes called Turnover or Sales etc.) and what I am looking for here is growth over the previous Year or previous relevant Period or whatever. If I see that Revenue is flat or has shrunk, then my Alarm Bells are dinging loudly and often my existing knowledge of the Stock will explain the shortfall or a Footnote down the bottom of these Headline Financial Items will give some sort of explanation. I often find that ‘Like for Like’ (L4L) Figures are included and these need to be interpreted to find out what has changed - often a Business has been sold off or an Acquisition done and it hugely distorts the Figures.

You need to be extremely careful in terms of understanding the comparison basis - i.e. whether it is against the last year or Like for Likes or if the comparison has certain bits excluded (usually this will be in the small print just below although not always). There is an important psychological aspect to think about here (and this applies through everything a Company puts out) and that is ‘Availability Bias’, which is where your Brain focuses and ‘works’ on the information that is there in front of you and you don’t consider what has been excluded from the Update but I do find that with experience and by using a methodical and robotic process when reading all these Statements you get steadily better at ‘spotting’ what is not there !!

On a topical note it must be like looking for a Black Hole - it is not actually there so you are trying to see, well, nothing.

There is no set structure for these things and maybe we will get ‘Orders’ next and this is particularly the case on Stocks that are very much a Project based kind of thing. For example, I hold BAE Systems BA. and that is very much a Business that does lots of long term Projects that can be over many Years - so the intake of Orders in a Period and the resulting cumulative Order Book are very important things to keep an eye on. You obviously want to see the Order Book growing steadily (or quickly !!) over time and it is often worth doing a quick mental calculation to figure out how many Years of Revenue at the kind of rate they are currently Reporting it each Year are covered by the existing Order Book. If they are chomping through the Revenue quickly and building the Order Book slowly, then there could be a problem down the track. Having said that, sometimes a Company changes its approach and goes for ‘higher quality’ Projects that have higher margins - this might mean that the Order Book gets smaller but it might not be a problem. Again this is just something to be aware of.

As I mentioned there is no set standard for what is put in these ‘up front’ Headline Items on a Results Statement and you can pretty much find anything once you have read many of these. Chances are next up will be various sorts of ‘Profit’ related measures and of course the ubiquitous and much maligned EBITDA (Earnings Before Interest Tax Depreciation Amortisation). This one is not all that great but it does approximate to Cash a bit so it is worth bearing in mind for that reason - and of course again we want to be seeing the EBITDA rising against the previous Year and/or previous Period etc. and if it has fallen or stayed flat then we need to be digging into the ‘excuses’ and trying to work out if there is a good and valid reason for this change. Again the Footnotes (the small print) often give good clues as to what is going on and if the EBITDA is down, then it could be that Debt has gone up and/or Cash has gone down (the Debt and Cash situation is what really matters).

You might find ‘Gross Profit’ and ‘Cost of Sales’ and things like that and really it is a case of using your Brain Power to figure out the direction things are moving in and whether this is good or bad and it is worth getting under the Bonnet and trying to decipher if there are good and valid business reasons for why the numbers are moving the way they are.

It is normal to get some ‘per Share’ measures and the usual one is ‘EPS’ (Earnings Per Share) and ideally we want this to be going up and if it is not, then we need to understand what is happening. It could be legit, or it could be that there are big problems and we need to get to the bottom of it. Sometimes it could be that more Shares have been issued and that has caused the change etc. If it is a Share I already own I usually can figure out quite fast what has caused the change and it is often because there has been Acquisitions or something. If it is a Share I am not so close to then often it can need a bit of digging and very often in the mornings I am going back through the RNS list on the ADVFN App for a particular Share and hunting quickly through the last Results Statement to look for what has changed.

A similar one to the EPS is the lovely (hopefully) item of ‘DPS’ or Dividend Per Share and this is one of the most important Headline Numbers we can come across. Obviously we want to be seeing growth Year on Year in the Dividend and we want it at a steady and affordable rate - there is no point in a Company giving you a 60% rise in the Dividend one year if they then run out of Cash and have to cut it a later Year. I would far rather have a steady 10% hike in the Dividend Year in, Year out, that can be sustained without stretching the Business than have unreliable and lumpy Dividend Payments. One thing I love to see is when a Company pays a ‘Maiden’ Dividend and commits to a ‘Progressive Dividend Policy’ - those are usually very good signs that the Share can rise over time (although of course in the very short term it might be overstretched and need a pullback).

In Part 2 I will continue in a similar vein to this but something I will quickly mention is that the ‘tone’ of the Statement is really important and sometimes you can be reading through and very early on you start to get a real sense that this is a Business which is starting to struggle; or conversely you occasionally get some that are just so flowing with bullishness and enthusiasm - but of course you need to as always stay calm and unemotional yourself and try to focus on the facts not just some fluff and hype that the Directors are trying to fool you with. This is particularly a risk on Loss-making AIM rubbish which is usually over-hyped and rampy, simply because they are about to issue a Placing and are trying to get the Share Price up !!!

In Part 3 I actually show a technique that you can use to help analyse a set of Results which particularly applies to Turnaround situations and I will use an actual Stock with a recent Results Announcement to demonstrate it in practice.

Cheers, WD.