Analysing Balance sheets for growth shares

This is a discussion on Analysing Balance sheets for growth shares within the Economic & Fundamental Analysis forums, part of the Methods category; Hi, I’m looking into studying balance sheets and income statements to help me in looking for growth stocks. Could you ...

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Old Oct 26, 2006, 11:57am   #1
Joined Jun 2005
Analysing Balance sheets for growth shares

Hi,

I’m looking into studying balance sheets and income statements to help me in looking for growth stocks. Could you tell me if the below is good to look for and could you please add anything else I should look at?

-Current assets must be higher than current liabilities
-Turnover must have been increasing higher than the last quarter for each of the last 3 quarters
-Assets must be increasing each quarter for the last 3 quarters

If turnover is lower than the last quarter is this a sign to sell?

Thank you for your help

Mike
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Old Oct 26, 2006, 4:50pm   #2
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Hi Mike,

If you are looking at quarterly fundamentals, I would suggest that you compare the most recent quarter's earnings to that of the same quarter 1 year ago. This can be a better indication of growth than just looking at quarters in sequence.

You should be looking at EPS as well as just turnover.

Drop me a private email if you would like a chat, as I trade stocks every day using a combination of Fundamental and Technical analysis.


Thanks

Damian
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Old Oct 26, 2006, 5:37pm   #3
 
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Quote:
Originally Posted by phatmike
Hi,

I’m looking into studying balance sheets and income statements to help me in looking for growth stocks. Could you tell me if the below is good to look for and could you please add anything else I should look at?

-Current assets must be higher than current liabilities
-Turnover must have been increasing higher than the last quarter for each of the last 3 quarters
-Assets must be increasing each quarter for the last 3 quarters

If turnover is lower than the last quarter is this a sign to sell?

Thank you for your help

Mike
If you are studying balance sheets for this purpose you might consider tabulating the results for easy reference.

You could use two pages, facing each other in a loose leaf folder.

Reserve the left hand page for numerical information and the right hand for a graph illustrating the data in the left hand page.

Apart from growth in turnover and assets you are obviously looking at liquidity.

To make the work simpler and neater youi could use ratios rather than figures:

The quick ratio = cash in hand and at bank over current liabiiities.

The current ratio = cash in hand and at bank plus marketable securities over current liabilities.

Other ratios you would find useful include NAV per share, EPS, CVR, and divi yld.

You could show a particular quarter that you use as a benchmark and from there express subsequent quarters as percentile increases over the benchmark.

Then on the right hand page you could express some or all of this as graphs.

This would help you have all the reference material at your fingertips when needed.

I hope and expect this helps.
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Old Oct 27, 2006, 5:25pm   #4
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phatmike started this thread A very good idea, should make it a lot easier to assess the info.

Thank you Damien for the offer to chat.

In regards to comparing this quarter’s data to the same qtr a year previous, what should I look for i.e.

What %age should turnover have increased?

What %age should profit from continuing ops have increased?

What’s a good ratio value for quick and current?

Should I compare the previous qtr %age turnover increase compared with that same qtr a year previous and then compare that %age with the latest qtr (compared to the latest qtr a year previous)? How much should turnover have increased?

Why shouldn’t I be looking at just comparing the quarters in sequence?

Sorry for all the questions,

Thanks
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Old Oct 27, 2006, 5:41pm   #5
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Hi Mike,

As a general rule of thumb, to ensure you are investing in a quality company, I would say a 20% increase in the current quarter's earnings compared to the same quarter a year ago would give a good indication of growth. Combine this with increasing annual earnings over the last 3 years, and you are well on your way to filtering down to the best performing companies.

The problem with only looking at quarters in sequence is that many companies' profits are seasonal. For Example, Woolworths might see a dip in profits in their quarter from Jan to March when compared to Oct to Dec because their Oct-Dec quarter is their Christmas build-up. It's not that their Jan-March quarter is poor and the company has stopped growing, it could just look like a poor result if you're only comparing that quarter to their Christmas quarter.

Hope that makes some sense !

Feel free to email me if you would like to talk in any more detail.


Thanks

Damian
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Old Oct 30, 2006, 5:30pm   #6
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phatmike started this thread Hi Damien, I’ve been looking at comparing this quarter’s data with a year ago and you’re right, it does make a lot of sense, thanks. I’d like to know what your thoughts on when a to exit. i.e. if a company has increase in profits for the last 3 years and the last quarter’s data looked good with a 20% increase in profits and rev but the new quarters data is out and it has increased just 10% but still above analyst expectations, would you stay in this stock and wait for other indicators e.g. when the analysts expectations aren’t met or would you sell?

Also, if analysts are lowering their estimates is this a sign to exit or is that ok but as long as the company is meeting those expectations?

Thanks for the help
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Old Oct 30, 2006, 6:37pm   #7
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Hi Mike,

I did send you a personal mail about a week ago - not sure if you got it.

There are many different ways you can interpret stats and figures relating to company fundamentals. Some aspects are vital to take into consideration, and others are not so important. The approach you take should be tailored to whether you want to be a longer-term investor or a shorter-term trader. In my stock trading, I time my entries and exits using a combination of technical and fundamental analysis.

If you send me a personal email via T2W, I will be happy to have a chat with you about your stock trading in more depth.


Thanks

Damian
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Old Nov 1, 2006, 9:23pm   #8
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I recently wrote a VB prog to judge the influence of fundamentals on performance. Essentially it involves scatter charts. I am able, in one click, to see how balance sheet ratios, p&L ratios, cash flow fig or any combination, along with relative strength affect the relative performance, 3months, 6 months and 12 months out. I have to tell you that for the UK market I found NO statistical correlation WHATSOEVER for the past 8 years. let me reapeat that NO STATISTICAL CORRELATION COULD BE FOUND TO LINK PERFORMANCE WITH FUNDAMENTALS. Now, you might well be able to cite incidences of companies with sound balance sheets and strong earnings growth that in future do well. However, what you will be ignoring are companies with similar fundamentals that absolutely tank (as expectations fail tto be met) . You will also be ignoring the companies with huge debtsand no earnings that in future do just as well, merely because they show signs of being able to steam up a mirror.

I should point out that the chief analyst of cdrefs does not use fundamentals to invest or trade. Instead he invests exclusively in property. makes you wonder, when a guy surrounded by comapny stats all day long chooses, even with property at ludicrous levels, to ignore his own work.

Fundamentals are a great way of making yourself sound as if you know something worth knowing, period. In actuality, it's all in the price.
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Old Nov 23, 2006, 9:32pm   #9
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Essential reading:

Accounting for Growth by Terry Smith.

Grant.
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Old Nov 23, 2006, 10:10pm   #10
 
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As fundamentals are pretty much the second draft (albeit possibly more accurate than the previous leaks, headlines etc) of company history how can they be of any value. Personally i feel that if your a trader, you should look at the sentimemt today in the instrument, if you a long term investor look at a series of balance sheets and read what the Chairman & Chief Exec have to say about the "challenging conditions facing us for the next few years"
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Old Nov 24, 2006, 9:41am   #11
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JP O'Shaughnessy in the book What Works on Wall Street examines which ratio's drawn from fundamentals produce the best returns. The original book was published in 96 but I think there may be an updated edition now.
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Old Nov 24, 2006, 9:47am   #12
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Originally Posted by Tuffty
JP O'Shaughnessy in the book What Works on Wall Street examines which ratio's drawn from fundamentals produce the best returns. The original book was published in 96 but I think there may be an updated edition now.
Warning to would be readers. It's more statistical than entertaining reading. What he says is, probably, true and he produces pages and pages of tables to prove it!

Split
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Old Nov 24, 2006, 9:59am   #13
 
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Quote:
Originally Posted by Sledgehead
I recently wrote a VB prog to judge the influence of fundamentals on performance. Essentially it involves scatter charts. I am able, in one click, to see how balance sheet ratios, p&L ratios, cash flow fig or any combination, along with relative strength affect the relative performance, 3months, 6 months and 12 months out. I have to tell you that for the UK market I found NO statistical correlation WHATSOEVER for the past 8 years. let me reapeat that NO STATISTICAL CORRELATION COULD BE FOUND TO LINK PERFORMANCE WITH FUNDAMENTALS. Now, you might well be able to cite incidences of companies with sound balance sheets and strong earnings growth that in future do well. However, what you will be ignoring are companies with similar fundamentals that absolutely tank (as expectations fail tto be met) . You will also be ignoring the companies with huge debtsand no earnings that in future do just as well, merely because they show signs of being able to steam up a mirror.

I should point out that the chief analyst of cdrefs does not use fundamentals to invest or trade. Instead he invests exclusively in property. makes you wonder, when a guy surrounded by comapny stats all day long chooses, even with property at ludicrous levels, to ignore his own work.

Fundamentals are a great way of making yourself sound as if you know something worth knowing, period. In actuality, it's all in the price.
That's interesting, sledge.

At the end of the day a share's market value must be based on the income stream it will provide by way of dividends. The market price is the sentiment adjusted value dependent on day to day estimation of whether that income stream is likely to increase, decrease or be sufficient in the face of competing investments.
good trading

jon
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Old Nov 24, 2006, 11:32am   #14
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Originally Posted by barjon
That's interesting, sledge.

At the end of the day a share's market value must be based on the income stream it will provide by way of dividends. The market price is the sentiment adjusted value dependent on day to day estimation of whether that income stream is likely to increase, decrease or be sufficient in the face of competing investments.
good trading

jon
Value shares are based on the price to assets. Growth shares, which I use, are based on EPS growth over the years. A great growth share, after George Davis left, was NXT. I bought that for less than 2 pounds, but it was available for pennies- I wasn't brave enough! Another, which I have held for several years, is SUY. The latter is curious, because I was advised by a broker to buy another, more important, upholstery share (DMS, or something similar?), which went bust. Instead. I worked on PEG. If anyone wants to read more about that, I recommend "The Zulu Principle" by Jim Slater.That book has made me prosperous enough to be able to play with the Footsie index and I owe the author a debt of gratitude.
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Old Dec 23, 2006, 7:39am   #15
 
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Quote:
Originally Posted by barjon
That's interesting, sledge.

At the end of the day a share's market value must be based on the income stream it will provide by way of dividends. The market price is the sentiment adjusted value dependent on day to day estimation of whether that income stream is likely to increase, decrease or be sufficient in the face of competing investments.
good trading

jon
Actually not far off.
Market value in the absence of dividends can be measured a number of different ways in addition to the ways that you have highlighted.

*Liquidating value
*Value to a private control buyer [LBO's etc]
*Earning power

The market price however, is composed of many variables also;

*sentiment
*arbitrage between the different available securities
*the influence of price, upon itself

jog on
d998
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