How to look through properly a company Balance Sheet?

What actually a balance sheet is? Balance sheet is one of the financial document that company need to report out to the public. Previous post mentioned about the income statement, and this post will talk about the Balance Sheet.

The purpose of the Balance sheet is to show the condition of its financial health of a business.
When flipping around on a company's annual report, normally I found myself blankly staring at dozens, or even hundreds, of pages of numbers and tables.
I am engineering trained and not used to look at huge numbers and these financial term.

What Is a Balance Sheet?
A balance sheet provides a picture of a company's assets and liabilities, as well as the amount owned by shareholders. These three components have to balanced out and are important information for the investors to understand the business strength.

Let's start to analyze a real business balance sheet again by using yahoo finance. For this case study, will used back the same company during our study on the Income Statement.

Once you have search Nestle within the yahoo finance, click on the Balance Sheet and Annual balance sheet, you will have a sample table like below.

So the first part of the Balance Sheet is the break down of the company Assets. Assets consist of cash, investment, inventory and everything that business owned that can be liquidated into cash when needed. Analogy for us as a personal individual, our asset could be House, car, fixed deposit, shares, unit trust, gold etc can be sell off and get back our cash if we need to do so.

The total current Asset dated 12/30/2019, Nestle asset stand at 1.073 Billion. From google search, the meaning of current assets is simply cash and other assets that are expected to be converted to cash within a year.

As for the Non-current assets means the asset not able to convert into cash within the next 12 months. Warren Buffet called the Goodwill and Intangible as soft asset, because there are not a real asset.

From Investopedia, Goodwill is describe as an intangible asset that is associated with the purchase of one company by another. Specifically, goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology represent some examples of goodwill.

Thus, Total non-current assets for Nestle is at 1.653 Billion. Then we sum up the Total Asset and Total non-current assets for Nestle is 2.726 Billion. After looking at the first component of the balance sheet on Asset, now we will move on to the next component which is Liabilities.

In layman term, it just like use we have housing loan, car loan, credit card outstanding etc are called liabilities that we owed to the bank. These are the money we need to pay in the near future. Expectation is all these liabilities to be payoff within next 12 months.

For Nestle, they have Current debt of 0.257 Billion and account payable of 1.133 Billion. Sum up will be 1.654 Billion. Nestle do not have any long term Debt but with Deferred Taxes liabilities under the Non-current Liabilities column.

Add up all the Total Current Liabilities and Non-current Liabilities will be 2.061 Billion
Let's move down to the bottom and will show the Total equities.

Total stockholders' equity of 0.664 Billion comprises of Common stock and Retained earnings (unrealised gain for business). The important number end up will be the Total stockholders' equity.

Total stockholders' equity = Total Asset - Total Liabilities
                                          = 2,726,538 - 2,061,614
                                          = 664,924

So the last row is Total liabilities and stockholders = Total Liabilities + Total stockholders' equity
                                                                                  = 2,061,614 + 664,924
                                                                                  = 2,726,538

After going through the three components in the Balance sheet, how do we know if this is financially stable or good? one way to find out is to find out the ratio of the Total Current Asset over Total current Liabilities.

Total Current Asset / Total current Liabilities =  1,073,013 / 1,654,750 
                                                                         = 0.648 (preferably to be above 1)

It just simply say that, if all the asset requires to dispose off, it will not able to payoff all the debts incurred. Thus, this will put the business in risk.

Second important to take note is the Total Cash and Total Current Asset if they are growing year after year. For instances, Nestle Total Cash is down from  23.996 Billion in 2016 down to just 10.399 Billion in 20192. As for Total Current Assets, it maintain flat 1.030 Billion in 2016 versus 1.073 Billion in 2019

Do the same undertanding and analysis for the Total current liabilities and Total Liabilities.
Form the Balance sheet we can observed that Nestle Total Current Liabilities is increasing over years. But the Current Asset did not increase. If compare the Total Asset Versus Total Liabilities, both are moving in the same direction with similar rate. For my opinion, it is still healthy.

As for the Total stockholders' equity, it looks like it is about flat and not growing much for shareholders.

All above sharing is just purely for educational purposes. Not a recommendation for buy or sell.Do your own due diligent.

Hwo to analyze Income Statement?

A lot of us find it challenging to read a company's financial statements for until they understand how to interpret them. I assumed that those come from the financial background can easily understand what are those numbers for. But for the rest of people like me is engineer, is hard to understand. Frankly that I am struggling through during my MBA course.

What Is the Purpose of an Income Statement?
The purpose of the income statement is to show you if the company is making profit or loss during a period of time that the business is generating. Income statement also able to show the growth and operating margin of the business. We heard a lot of the top and bottom line in the business world, do you? You are able to find these two number in the income statement.

Some people called the income statement as a profit-and-loss statement, shows total revenues and total expenses over a specific time period.

In fact, you may prepare a simple and basic income statement for yourself. Let me show you in below example:

Here is an example of a basic income statement, covering the period of one month:

Your monthly income either from Sales or Salary (or Gross Income): $3,000
Additional Online sales income                                                          :  $   200
                                                                                   Total Income   :  $3,200

(-minus) Expenses:
House rent                                                                                             :$   400
Dining out                                                                                             :$   600
Petrol                                                                                                     :$   200
Phone Bill                                                                                             :$    160
                                                                                  Total Expenses :   $1,360

Net Income:                                                                                            $ 1,840

If you are able to understand above simple illustration on how will be the income statement like, you will be able to understand the company income statement in the next. Let's pick Nestle as an example to analyze it.

Normally I will be using yahoo finance to search for the company financials. Once you are in the yahoo finance and search for NESTLE, on the tab, click on the Financial and will bring you below statement.

First you need to be aware that the reported number are in thousands ('000). For example, the Revenue showing 5,518,076, it should be read as 5.518 Billion.
Second column on the income statemen show that TTM. TTM stand for Trailing twelve month. On the 12/30/2019 Nestle is generating 5.518 billion Revenue. TTM showing the same as the last quarter report is not out yet. Once the Q1'2020 report is out the TTM number will be different from the 12/30/2019.

So the total revenue generated by Nestle shown here is the Top Line. This is the revenue generated before paying any expenses. The next line is the Cost of Revenue which is the total Manufacturing cost, advertising cost and delivering cost to the customers. After deducting from the Total Revenue, what left is the Gross Profit.

Gross profit = Total Revenue - Cost of Revenue

Gross profit will be used to calculate the Gross Margin.

Gross Margin = Gross profit / Total Revenue x 100%
                       = 2,073,515  /  5,518,076  x 100%
                      = 37.57 %

A such, the Nestle gross margin is 37.57%. Let's move on to check their expenses. Under expenses, there are Selling General and Administrative (SG&A) & Total Operating Expenses. For Nestle, Total Operating Expenses is 1.161 billion, 1.169 billion for SG&A. 

Operating Income = Gross Profit - Total Operating Expenses

                              = 2,073,515 - 911,993

                              =1,161,522

The different of 1.169-1.161 = 0.008 Billion did not report in the yahoo finance. Thus, requires to look into the annual report posted by Nestle in order to find out the details.

Next line is the Operating Income or Loss for the Nestle is 0.911 B. If this line number show negative, then it signified that it was operating at loss.

Once we know the Operating income, we can find out the Operating Margin.

Operating Margin = Operating Income / Total Revenue  x 100%
                              = 1,161,522 / 5,518,076 x 100%
                              = 21 %

Good operating margin should be above 15%. The higher the operating margin, the better it is. For this example, Nestle operating expenses is less than the Gross Profit. Otherwise, it will be at loss. 

Now, let's move down next line, it show that Nestle has to pay Interest of 40.663 Million in last 12 months.
Income Before Tax = Operating Income or Loss - Interest Expense
                                = 911,993 - 40,663
                                = 875,725

After paying Income Tax of 202,812, the Net Income will be 672.913 Billion
This number is the bottom line which is widely used.

After going through the whole income statement here, hope you are able to understand the number well in your study of other company.

Some of the point to take note from the income statement
a) Operating Income or Loss: Must be positive
b) Net income number: Must be positive

Take a look on the history at least 5 to 10 years that enable you able to see the trend. Do not just look at 1 year data to gauge the company performance.

REITs dividen yield is attractive now, should I invest?

A lot of people want to buy REIT because of its attractive dividen. When the market crash and REIT prices are not spares as well and will similarly react to the market. When the price decreases, the dividen yield will reflecting higher. Is it a right way to tell a good time to buy in REIT when the Dividen indicator showing high? Dividen yield is only one of the key part in REIT investing.

Let's go back to the basic How is the Dividen Yield calculated?
Dividen Yield is calculated Dividen Payout divide by the REIT price as shown below:

At current market juncture, we may find out some of the REITs are more than 10%, eg. Hektar REIT at 11% & Tower REIT at 10%. It looks very attractive and a lot of us wanted to jump in to buy REIT now. The word of precaution is not just to look at one indicator only and decide to buy into that high dividend yield REIT.

Thus, from the formula above, we should aware that the Price is the current price and Dividend is the past dividend that has payout to the investors. So it has some implication here. When we are using the past dividend with current market crashed price, it could give us a false indication that it is high dividend. We should wait till next quarter if the dividend payout will be cut in order to reflect to the price. We are not sure if there is any corporate actions during this market crash from the REIT's management point of view.

If the dividend is cut due to the stalled economy from Movement Control Order (MCO), then the REIT price will drop further. So the rule is not just look at Dividend Yield and buy into REIT due to its give you the highest yield.

Another way to access REITs dividend yield is to check back the past history of the REIT so that it can give a clearer picture how does REITs perform in the past market crashed.

Again, snapped shot below is from yesterday Starbiz Top 100 companies that has four REITs registered, namely -IGBREIT, PAVREIT, SUNREIT, AXREIT with their Dividend yield range from 4.8% to 6%.

There are total of 18 REITs in KLCI as below. Other than the Dividend Yield, there are others indicators like Price to Book, NAV, Gearing ratio etc.

Let's analyze another indicator called Net Asset Value (NAV)
Calculating NAV is simple: Simply subtract the value of the REIT's liabilities from the value of its assets, and then divide the result by the number of shares outstanding. When we buy shares or REITs, every investors want to buy undervalue stocks and we can find it a lot during the market crashes. Since a lot of REIT's price come down, which will be an undervalue REITs with good buy?

To answer that question we need to compare the current Price with Net Asset Value(NAV) with below two scenarios:

Undervalue: When Price < NAV

Overvalue: When Price > NAV

Using back the same table, a column of Ratio of Price/NAV is computed. Negative value means the current price is undervalue compare to their Net Asset Value. However, with just one data point at this instances to make the decision to buy is not wise as well. We should pull back the past 10 years or 5 years history of each NAV Vs price, is it always at the undervalue of 40%, 37%? You will find some of the REITs are always at 30% undervalue in the past and during this time they dipped further does not mean that it is a good buy now. A good REIT normally will not suffer a heavy price crash, if it does, it will recover fast. Thus, do refer back to the past history o understand well.

Word of precaution again, while net asset value is a helpful calculation, it's not necessarily the best way to gauge a REIT performance.

Conclusion, during market crash, it is not to look at the REITs that drop the most resulting in high dividend yield only. As a investor, we should look at the from Total return aspect which includes the capital gain and stable consistent dividend yield in order to grow your wealth.

This is the good time to look into those good REITs and put into your watch list.

Is the market in recovery mode?

Today is the 31st day of the Moving Control Order in Malaysia. The COVIT-19 statistic for Malaysia seem to be positive and well under control. Refer to below chart as per updated on 17 April 2020 by The Star. The infected cases is down to two digit for the past 2 days, yesterday is at 69 new cases.It signified that the condition is getting better and better. Will there be no more Phase 3 MCO? 

Will this translate to better economy coming? Look at the world wide stock market below:

Everyone wants to know if the market is bottom at that time (23 March 2020), but there is no clear answer to this question even today. So today we are asking, if the market is rebounding strong now? What we can see that the expanding coronavirus pandemic pushed the market into bear territory earlier in March 2020.

In the meantime, almost all countries come out the stimulus plan to support the economy haven't been enough to sustain the lock down situation. Nothing can be move, everybody stay at home, money is not flowing to anywhere except digitally.

From the above table shown, since 23 March 2020, it keep going up till today. The rebound by the worldwide stock market off its March 23 coronavirus low is impressive, but is it going to be real and sustainable?

In our local KLCI, since the market last bottomed on the 23rd March when KLCI falls to a level of around 1260, it has rebounded some 140 points to end this week at 1407.

The market continued to breach one resistance line after another in the past few weeks. As a point of reference, the current KLCI levels right now is similar to what we've last seen in Sept 2011. Wow, that is 9 years ago, we are back to level of 9 years ago.

However, today situation is different from Sept 2011. What we are facing now is the worldwide health threat. The world is stand down, either Lock Down or restricted movement. No one travelling, flights are grounded, retail stores are closed, all events are stopped and a lot more.

Even if the lock down slowly open up, like Wuhan open up after 76 days, we are in 31 days since 18 March, the economy will not straight away back to the normal as we had last year. When will aggregate demand recover to pre-virus levels. The situation might be a lot dire now with unemployment almost at an all time high and many businesses going to close down.

As such, look at the current rebound rate, will it be second round of crashed? I think no one able to answer and we have to make our own judgement and prepare for it.

Why we should invest into US markets?

As announced, the MCO will be extended to 28 April 2020 is to fight COVID-19
Since our MCO is extended for another 14 days on Phase 3, I tidy one of my drawer and saw my ex company share statement. This is my first time bought into the foreign shares.
In 2015, first time I venture out from my semiconductor industry and joined a green field newly setup company, Abbott Manufacturing Kulim. Abbott Manufacturing Malaysia gave me chance to own their share through ESPP (Employee Stock Purchase Plan).
29 Jul 2016 is the date of acquisition of the shares at USD 44.81 per share. Today Abbott Price is at USD USD 86.04. Refer to below the Price chart from Yahoo finance.

Still recalled my previous article sharing that one Abbott secretary who amassed a $7,000,000 fortune for charity by the time she passed away? If not, you can read from here.
During these past 2 weeks MCO, my another group chat is also discussion we should invest into US stock now. Extracted some of the text exchange as below:

Why we should invest into US markets?
Is natural that we Malaysian invest into KLSE locally and not foreign markets. We might think that investing in foreign markets could be risky.

a) Global Companies
A lot of worldwide companies that we known dailies is listed in USA stock market, for instance, VISA, Master, Starbuck, Pepsi, Coca Cola, Microsoft, Facebook, Google, Johnson & Johnson, Disney, Netflix etc. These are not available in local markets and we can buy a share to own them.

b) Most online  material
All of the above companies mentioned on section (a), a lot of research material are widely available online. Any research information need on the companies are easily available within seconds.

c) Huge market capitalization
In US market, closed to 200 billion traded daily. Just give a perspective on how big is their market compare to KLSE.
For KLSE, if all the listed 1000 plus companies added up their capital, it will sum up at around MYR 1.379 billion (~USD 322 billion) as of 31-March-2020.

Microsoft                 ~ USD 1,260 billion as of 12 April 2020
Google                    ~ USD   830 billion as of 12 April 2020
Facebook                ~ USD   499 billion as of 12 April 2020
Johnson & Johnson ~ USD 372 billion as of 12 April 2020

Visa                         ~ USD 373 billion as of 12 April 2020

Master Card            ~ USD 267 billion as of 12 April 2020
Coca cola                ~ USD   210 billion as of 12 April 2020
Pepsi                       ~ USD   185 billion as of 12 April 2020

Comparing our local market capitalization to just one companies like Facebook, Google and Microsoft, already far exceed to our total local capitalization. That is how big the US market.

d) Market Performance
Chart below can be self explainable on the market performance from 2010 till 2019 (10 years)

US market yearly return range from 18.1% - 35.7% whilst our local yearly return is about 2.4%

e) Currency devaluation
If we invest into US and should change our MYR to USD. Past 10 years the MYR has weaken yearly about 4%, whilst for SGD, is weaken about 2.5% ever year, refer to both chart below. 

The currency effect also makes it possible to make money if your stock did not perform well. The stronger the USD, it will be another booster to increased your investment return. Always remember that whenever you buy shares of a foreign stock, you’re actually making two investment decisions. You’re betting on both the performance of the company and the currency itself. The ideal scenario is being right about both: the stock price goes up, and you get an extra benefit from a strengthening of the currency. The worst-case: the stock goes down, and the currency loses value relative to the dollar. 

Based on the above five factors and with my initial investment to the Abbott Laboratries, it exhibit and proof that it was a right decision 4 years ago. Now will look into more in depth of US market.

2nd largest Market Capitalization Stock in KLSE: TENAGA NASIONAL BHD (5347)

Last week I wrote on Maybank which is the biggest market capitalization in Malaysia. Today, I am writing on the second largest capitalization is Tenaga.
Snapshot below is the Top 100 Companies in KLSE by market capitalization on 11 April 2020. Tenaga is the second largest stock based on market capitalization in KLSE, with RM68.5 Billion. Based on the closing price on 110 April 2020,  the Price Earning ratio is 15.1 with Dividen Yield of 8.3%.

TENAGA is the largest player in generating and providing electricity in Malaysia. Tenaga Nasional Berhad is engaged in the generation, transmission, distribution, and sale of electricity in Malaysia. Its core business comprises- Generation division, Transmission division and Distribution division. If you do not know Tenaga, you are staying in the jungle probably. Tenaga also diversified geographically through equity ownership in the UK, Turkey, Saudi Arabia, Kuwait, India an Indonesia and Pakistan. Without electricity today, we all will be suffering like no air-conditioning running, our devices cannot be charged, no light, fan etc. So electricity is utmost essential after the Air, Water, Food, do you agreed.

Ok, enough introduction of Tenaga, let's focus on the stock valuation. From the stock chart from i3investor.com, the Peak price for Tenaga for past 5 years is at RM15.74 and already declines 46%. Year to date is drop 31%. Yesterday closed at RM12.04

Data from Morningstar:
Consistent growth in Revenue.
Consistent growth in Net income, drop in last 2 years
Consistent growth in Dividen with healthy payout ratio range from 26.75% - 80%
Free cash flow is positive for past 9 years.

As for the Dividen, there is increasing in term of the yearly dividen payout. Dividen payout ratio is range from 26.75% to 80%, a healthy and sustainable range.

As for the Dividen yield for past 5 years,

Max = 4.00%

Min = 2.18%

Ave = 3.41%

Current is 8.30% above the 5 years average

As for the PE ratio for past 5 years:

Max = 26.65

Min = 7.20

Ave = 16.00

Current is 16.54 which is above the Average

As for the P/B ratio for past 5 years, it stay above 1.2

Max = 1.79

Min = 1.01

Ave = 1.38

Current is 1.01 below the average

In Summary, in my personal opinion, electricity demand may drop during the MCO period due to Covid-19 but earnings could be unaffected. Tenaga’s earnings are expected to be sustainable at current level with stable cash-flow and dividend payout.

Biggest Market Capitalization in KLSE Maybank 1155

While reading The Star newspaper yesterday, I saw a column Top 100 Companies in KLSE by market capitalization. Refer to below table extracted. Maybank is the largest stock based on market capitalization in KLSE, with RM83 Billion. Based on the closing price on 3 April 2020,  the Price Earning ratio is 10.1 with Dividen Yield of 8.6%.

Maybank is Malaysia largest bank and all Malaysian known the brand very well. If you are not familiar with Maybank, you must be a foreigner. Maybank is among the top 5 banks in ASEAN an international network of over 2,2000 branches and offices in 20 countries.

From the stock chart from i3investor.com, the Peak price for Maybank for past 5 years is at RM11.08 and already declines 36%. Year to date is drop 25%. So is the price is attractive now? Let's deep dive into the valuation in more details.

From the Financial chart below can observed that the Revenue is increasing every year. Profitability stay almost flat with slight decreasing on the profit margin.

As for the Dividen, there is increasing in term of the yearly dividen payout. Dividen payout ratio is range from 40% to 80%, a healthy and sustainable range.

As for the Dividen yield for past 5 years,

Max = 6.25%

Min = 5.27% ( Ex on April 2020, with RM0.39/share)

Ave = 5.78%

Current is 8.65% above the average

As for the PE ratio for past 5 years:

Max = 14.72

Min = 8.33

Ave = 12.7

Current is 10.1 which is below than the Average.

As for the P/B ratio for past 5 years, it stay above 1.1

Max = 1.6

Min = 0.9

Ave = 1.25

Current is 1.05 (RM7.4/RM7.05) below the average

Data from Morningstar:
Consistent growth in Revenue.
Consistent growth in Net income.
Consistent growth in Dividen with healthy payout ratio
Free cash flow is negative 10.56 mil ended last year. This could be a headwind to look into it.

In Summary, in my personal opinion, Maybank has a healthy growth.  It is not highly undervalue stock yet. Current price is just nice and able to tolerate the down side risk. This is not a buy or sell recommendation and purely is educational and discussion purpose only.