Thursday, January 20, 2022

How to invest - part 1. Preparation - How - Third Part

Hi, hello, and welcome to 2022 !

Apologies for leaving you guys high and dry the last couple of weeks. Much has happened in a personal capacity - of which, 100% of it affected my posting timelines. I shall try to make up for lost time, and hopefully not let the coming CNY affect my postings hehe.

We last left at: 

Part C. The financials 

Yes, the meat of the matter. The language of business. The undisputable facts of what was done vs what was promised. It is that which will tell you what has happened over the years under the leadership(s) of the management.

I will straight up tell you: looking at financials is crucial to understand the path and evolution of the company. It will tell you whether the endeavors of the management has bore fruit or served to produce more manure. The financials will show in the present, results of the management's efforts in the past, and may tell you what to expect in the future BUT it is not crystal ball. 

To do that - to get an idea of how the company will perform in the future, the only way (that I know of so far - if you know other ways feel free to let me know!) is to keep abreast of the company's development, read the earnings calls transcript, stalk the management's social media, read up on news which relates to the company and the industry, and also do the same for its competitors. 

In short, past performance is reflected in the financials while future performance can be clued  from (usually) non-financial data like the above.

Anyway, when it comes to the financials, we want to have a feel for a trend stemming from past performance to give us a year-on-year % change, and also the results from the last 12 months - aka TTM, trailing twelve months). To do that - we will be looking at 7 metrics. 

Yes. You read right. Only 7 metrics to bring you from rags to riches. Or so I am told.

- Revenue
- Gross profit margin
- Net profit margin
- Return on Equity
- Free cash flow margin
- Current and Cash ratio
- Debt to Equity ratio 

In the next post, I will start with Revenue, arguably the most important metric, without which none of the subsequent calculations will be possible.

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