Summary A practical guide to interpreting financial statements and valuing companies

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Summary - A practical guide to interpreting financial statements and valuing companies

  • 1 Financial reporting

  • On which things do investors predominantly focus on?
    1. Growth
    2. Composition of revenues
    3. Development of operational earnings
    4. Profit margins
    5. Net earnings
    6. Cash flow figures
    7. Dividends
  • On which things do regulators predominantly focus on?
    1. Capital expenditures
    2. Other investments
  • On what do lenders predominantly focus on?
    Company's debt serviceability
  • On which things do (trade) unions predominantly focus on? Why?
    1. Development of staff
    2. Employee expenses
    3. Earnings
    4. Dividends
    The last two suggests a possible magnitude of potential salary increases.
  • Next to his/her predominant interest, every stakeholder should also be interested in what? And why?
    A company's outlook and financial health.

    These are the obvious key ingredients of a company's ability to deliver on any stakeholder expectation in the future.
  • Why should every stakeholder understand how the owners view their investment?
    To anticipate likely board and management actions in the future, which may affect the interest of its other stakeholders other than shareholders.
  • Why is it often very insightful to analyse the revenue breakdown companies provide in their annual reporting?
    To better understand the development of growth drivers and -draggers, and of the evolution of competitive pressure over time.
  • 2 Shareholder return

  • What does the return that a shareholder gets for being (partial) owner of a company consist of?
    • Capital gains
    • Dividends
    • Share buybacks 
  • What is capital gain?
    The price increase (or decrease) a share has enjoyed (or suffered) since a shareholder invested in it.
  • What are dividends?
    Another source of income for shareholders and are usually paid by companies that are not in aggressive growth anymore.
  • What are yield plays in the investment world?
    Shares that are considered to have a lower level of risk and volatility because they are usually found among larger, more established companies.
  • What are growth plays in the investment world?
    Shares that will usually refrain from paying out dividends and will instead reinvest back into the company to expand.
  • 2.1 Capital gains

  • What is the most straightforward way in which shareholders can earn money from being shareholders in a company?
    By buying shares at a certain price, which rise over time, and hence by profiting from a share price increase.
  • What is for young growth companies often the only way to offer positive shareholder return to its investors? And why?
    Capital gain as growth companies usually don't distribute dividends yet. Instead, companies need cash to invest into their growth.
  • On what are share prices based on? Why are share prices of growth companies so volatile?
    On future (expected) earnings and dividends.

    Because the share price is based on future (expected) earnings rather than an actually existing (and tested) dividend policy.
  • Market expectations and hence the share price can change fast.
    1. Competitive dynamics
    2. A change in the economic outlook
    3. Regulatory adjustments that could affect a whole sector or industry
    4. Changes in management confidence and perceived execution challenges
    5. Surprises in the company's performance vs earlier market expectations    
  • As shares trade, how are share prices constantly adjusted?
    By the buyers and sellers who take actions on the basis of incremental changes in expectations.
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