Professional Documents
Culture Documents
a fair review of the progress of the business during the year, together with an indication of likely future developments the names of the directors and their shareholdings in the company important events affecting the company which have occurred since year end policy for payment of suppliers
-o in general the report is well worth reading. In fact, it is probably the best place to start because it may tell you about something that has happened in the course of the year which invalidates direct comparison of figures between one year and the next. It's better to find that out straight away, rather than ploughing into the "#$, only to discover later that year.to.year comparisons were pointless. /ne of the most interesting aspects of the directors' report relates to control and ownership of the company.
! c#ose company !where * or fewer persons have control% is a more difficult bid target for another company It is also #ess #i-e#y to grow through ac*uisition because the directors will be reluctant to dilute their interests by issuing new shares If the main director shareho#der is approaching retirement , and there is no obvious successor on the board, he may well be looking to sell out at some point soon. .ave there been any additions to the board . in particular of people with a known track record0 !re there any non/e0ecutive directors1 Too powerful a chief executive, unchecked by a strong board of non.executives, can be dangerous.
+lick here for an example of a profit and loss account. The key thing is to approach the "#$ with an understanding of what secrets it can yield up, and to have the right 'uestions in your head when you look at the numbers.
Is the business thriving1 "retty obvious really, and the answer doesn't have to be complicated either. $ook at the sales figures for the last few years . are they rising0 $ook at the profit figures for each year, and work out the profit margin . is it getting better or worse0 !re a## the divisions doing we##% or are there prob#em areas1 Turn to the footnote providing a segmenta# ana#ysis of sa#es% profit and assets. 2sing the figures there you can work out the margins and the return on assets for the company's different activities. (hich ones are doing well, and which ones are not0 (hat does management say about the emphasis for the coming year0 .ow vo#ati#e are pre/ta0 profits #i-e#y to be1 3igh fixed overheads and high borrowings can produce volatility in profits, because a drop in sales or an increase in the cost of borrowing will eat directly into the bottom line. ,nd if profits drop, dividends . your income . can be 4eopardised. (hec- the gearing ratio. .ow safe is the dividend1 If a company is paying out most of its earnings in dividends, any drop in earnings is likely to provoke a dividend cut. (a#cu#ate the dividend cover. ,as growth organic or by ac*uisition1 , business that grows organically is making more of its existing business, which means that 5"- should rise. , business that grows by ac'uisition may increase sales and profits but if it has issued new shares to pay for targets its 5"- may actually drop. It is fair#y easy nowadays to spot ac*uisition/based growth because companies have to separate the profits of businesses recently bought, sold or discontinued in the "#$. Is the company ma-ing a good return on capita# emp#oyed &R4(5'1 "rofits may be improving, but if the company is only doing that by increasing the capital employed in the business, it may not be a worthy home for your money. Do the R4(5 ca#cu#ation .ow does the company compare to its competitors1 If a company's profit margin and return on capital is half that of its competitors it may be a bad sign !poor management% or it may be a good sign !plenty of room for improvement%. !na#yse the P3 from a comparative point of view by #oo-ing at other companies in the same sector.
, "#$ tells you what a company has achieved in the past, which is fine, but investors are interested in what it can do in the future. The most popular tool for that is to examine the trend of its 5"-. 5arnings are the profits after ta0 . they pay for dividends to shareholders and fuel future growth. Ideally, they should show smooth consistent growth. 5xample 9oodco makes a post.tax profit of :1. million. There are ; million shares in issue. 5"6 :;.;<
(hat starts out as an easy calculation gets complicated because the rules on what constitute earnings are fu==y, especially when it comes to 'one/offs'.
(hen an industrial manufacturer sells a large parcel of land to a developer should that profit be treated the same as the profits from its mainstream activities0 If its profits one year are wiped out by an uninsurable natural disaster at its plant, should that event be regarded as 4ust a normal cost of doing business0
2ntil recently companies had discretion about how they treated one.offs. They could call an unusual profit 'e0ceptiona#' and include it in their 5"-, and call an unusual loss 'e0traordinary' and exclude it from 5"-. This made it very difficult for investors to gauge the true progress of the business. >arious )inancia# Reporting Standards &)RS' have tried to regularise treatment of one.offs, but if anything have made analysis harder. $arge companies now report 5"- in different ways, and the challenge for investors is knowing what basis has been used. (hen newspapers report 5"- they use 'ad"usted' 5"- !also known as 'head#ine earnings'% which strips out all profits7losses attributable to non.core activities.
The basic rule for you as an investor is to seek out companies that produce steady growth in 5"-.
5"- rarely stays the same. !8or do you want it to.% +ompanies don't actually pay out all their earnings as dividends, so you won't 'get back' <p every year for 1A years
-o "75 is a poor indicator of your 'payback' period. But it is a good indicator of the general confidence the market has in the company's ability to grow. , company with a high P:5 &;+<' is one where the market anticipates rapid growth and is willing to pay a price for the shares beyond what is 4ustified by historical earnings. , company with a #ow P:5 &=9' is one which is out of favour, or which is at the bottom of an industry cycle, and in which the market sees little excitement. The critica# *uestion is how shou#d you #oo- at P:5s1 It is worth looking at the principles adopted by $en >raham% the 'father' of va#ue investing:
+onsider buying companies that are continually growing their sales, but also doubling their 5"- every ten years +onsider buying companies whose "75 is below that of competitors in the same industry +onsider buying companies whose "75 is below its own past "5 ratio !i.e. 5"rising, "75 declining% +onsider avoiding companies with very low or very high "75s +onsider looking to buy stocks with a "75 of between C and 1;
It can be tempting for investors to buy into #ow P:5s but if you do, try to find an explanation for the low rating before hand. There may be a genuine reason . e.g. a publishing company may be making good earnings now but has a low "75 because the
market knows that its most valuable copyrights are due to expire. ?esearch the company to make sure there is not some news that everyone else but you knows about. !s for high P:5s . the ratings of );D recently en4oyed by high technology and internet stocks . well, what can one say0 They make no profits, but have huge capitalisations, because the market expects growth. ,t this point, the normal rules of investing give way to a gambling spirit, and rational analysis is replaced by theological belief. )urther tips:
!veraging over time To iron out short.term distortions, calculate ratios over a number of years. This will give you a truer picture of the company's performance. Trai#ing and #eading P:5s The trailing "75 is based on last year's earnings. The leading "75 is based on estimated future earnings !and should be treated with caution%. Ignore one/offs Eor example, a large and unforeseeable bad debt, or a natural disaster, or a large one.off profit from the sale of a piece of land. They don't give a true picture of the company's ongoing performance. P:5s are no use for companies with erratic earnings . like insurance companies or commodity traders . or other specialist companies like investment trusts or property companies where investors are mainly concerned with the value of the assets. ,atch out for creative accounting% especially companies fudging their earnings figures. , reliable measure of real earnings is dividends D the increase in net assets per share.
2sed in tandem with the "#$, it helps you refine your analysis of the year's trading It provides a fundamental snapshot of the company's financial strength.
+lick here for an example of a balance sheet. 1. $a#ance sheet in tandem with P3 The recommendations below re'uire you to calculate ratios from the balance sheet. If you don't already know the ratios, either take the tutorial '2sing ?atios to ,nalyse +ompanies' first, or look up the definitions in the 9lossary.
.ow has the return on assets been achieved1 +heck the return on capital employed !?/+5% and sales on capital employed to see whether the profits being made are satisfactory in relation to the capital invested in the business. ,lso check interest cover and gearing to see whether returns have been increased by using a large proportion of borrowed capital. Be aware that capital employed is one of the easiest figures for companies to manipulate through depreciation policies. .ow much money is tied up in stoc-1 In particular, is stock staying in line with sales, or is stock creeping up0 +heck the stockturn. Be aware that manufacturing for stock is sometimes used as a device to prop up profits. !re trade debtors rising faster than sa#es1 -lowness in collecting debts reduces the money available to the business and often conceals a bad debt. +heck whether the debt collection period is increasing unduly. Does the company get reasonab#e credit from its supp#iers1 If key suppliers are insisting on very tight credit terms !or cash with order% it may be because they know something that you don't. +heck the cash.to.cash cycle.
+. )undamenta# hea#th chec >earing &borrowings as a percentage of shareho#ders funds' If the company is highly geared, its profits are vulnerable to changes in borrowing rates. +heck gearing, and borrowing as a percentage of shareholders funds. Borrowing of one third of shareholders funds is okay for a normal company. Eor a company in a volatile business !e.g. commodity trading% borrowing should be lower than thatF for a company in a stable business !e.g. electricity supply% it can be higher. .ow is borrowing being used1 ?emember that borrowing is only worthwhile if the return on capital employed outstrips the cost of the borrowed money. (onsider the *ua#ity of the assets ?emember that the gearing ratio is based on asset valuation. If possible check what the assets are and how they have been valued. If most of shareholders funds are deployed in old manufacturing plant which needs overhauling, the true gearing ratio may be both understated and set to rise sharply. i*uidity +an the company pay its bills0 +heck the current ratio and the 'uick ratio.
The cash flow statement provides facts on whether a company has generated or consumed cash in the year, and how. It can be used in con4unction with the "#$ to assess the trading results, or it can be used in con4unction with the balance sheet to assess li'uidity, solvency and financial flexibility. (hat can you, as an ordinary investor with no particular skill or hankering for complex accounting rules, do with a cash flow statement0
(hec- whether the trend in cash f#ow matches the trend in profits1 If the "#$ says that profits are going up, but the cash flow statement shows a net cash outflow, an explanation is needed. There may be a good one, there may not. /ne explanation might be that the company has 'bought' market share by offering its customers extended credit. If there has been a net cash outf#ow in the year% was it steady or was it acce#erating or dece#erating towards the end of the year1 In other words, what was the trend0. -ome companies provide cash flow pro4ections, but the ones that do are not usually the ones with a problem. oo- at a share price chart to see what the mar-et has been thin-ing. (hec- to see if the cash outf#ows for one/off costs such as reorganisations match ear#ier provisions against these costs. If the cash outflows are lower than the provisions, watch out for further cash outflows in the coming period. !re there #arge items for interest receivab#e as we## as interest payab#e1 If so, the company probably has an active cash management programme, which is good if it knows what it is doing, not so good if it doesn't. (hec- the accounts to see if they e0p#ain the company's cash management po#icy. If they do, do you understand it0
Go not be alarmed if all this seems rather difficult to you. +ash flow analysis has been described by one investment analyst as ',lmost as specialised as heart surgery'. It is important that you appreciate the importance of cash analysis, but you don't need to be a guru. If you check whether '8et cash inflow from operating activities' has gone up or down, you will have done more than H;I of other private investors.
'ualify their audit by saying that they are unable to form an opinion on the accounts. . Disagreement with accounting treatment The auditors may disagree with the accounting treatment of some item in the accounts . for instance whether a debt is collectable. &. Bot a true and fair view The auditors may disagree so violently with some item in the accounts that they feel the accounts as a whole do not give a true and fair view of the state of affairs. +learly any 'ualification makes a company less attractive from an investor's point of view. , 'ualification of type & renders the company untouchable. ,s for the other two, it depends on the severity of the 'ualification. 4n ba#ance there has to be a presumption against investing in any company whose accounts are *ua#ified, because there are lots of companies out there whose accounts are not 'ualified.
Interim report "rospectuses and listing particulars +irculars on ac'uisitions and disposals Gocuments issued in a contested bid +ompany newsletters and maga=ines +ompany websites Eorm ;.E@ the form that 2K companies have to file with the -5+ if their shares are listed in the 2-. +atalogues and sales information literature ,9M
50terna# information
Registrar of (ompanies '+ompanies 3ouse' is where all 2K companies have to file accounts. These are available for inspection at offices in $ondon, +ardiff, Birmingham, $eeds, Manchester, 5dinburgh and 9lasgow, or can be accessed online. Telephone ;AC; &&&&<&< for information.
50te# cards: "rinted and electronic company information !; ;C CA ;A;*%. 8ow part of Thomson. R5)S: '?eally 5ssential Einancial -tatistics' devised by Lim -later and produced by 3emmington -cott in hard copy, +G and online formats. "rovides@ brokers' estimates and concensus estimate, detailed *.year financials D years estimates, listing of all directors and their shareholdings, company contact details, main activities of company, concise coverage of events, announcements and changes affacting the company in the last 1 months, key performance statistics and value indicators including calculation of important ratios. .emscott (ompany >uide: Information on ,&;; 2K stock market companies, published 'uarterly by 3emmington -cott. Cey Botes: Market reports and reviews on over ;; industry sectors, which includes analysis of the ma4or companies and their financial data. The 5stimate Directory &T5D': Monthly directory providing a profile of over 1,*;; 2K stocks, outlining its main activity, its market cap, share price graph and 1 monthly highs and lows, and ma4or shareholders. T5G is best known though, for the information it gives on brokers' forecasts. These are the forecasts of sales, profits, eps and dps given by the company's own broker, and also by other brokers who follow the stock. T5G presents them in tabular form, and shows whether a company has been upgraded or downgraded and what buy7sell7hold recommendations have been made. >ood pub#ic #ibraries wi## usua##y have these directories.
1<. (onc#usion
?eports and accounts are important tools for all investors, not 4ust professionals who have formal training in securities analysis. Don't be intimidated by them. *;I of what can be learned from reports and accounts re'uires only common sense and the ability to divide and multiply one set of numbers by another. Thin- about a company's business before #oo-ing at the numbers. The figures you get when you do your ratio analysis only mean something in the context of the company's business. (onsider the 9 components . directors report, "#$, balance sheet, cash flow statement and auditors' report . as pieces of the 4igsaw. /nly by understanding how they relate to each other can you see the full picture. $e carefu# not to p#ace too much re#iance on resu#ts of your ana#ysis. ,part from the problem of creative accounting, there may be accounting peculiarities that you have not noticed.
+heck the figures that you get against figures produced by R5)S and The 5stimate Directory to make sure you are on the right track.
+. ! word of warning
Investors who rarely look at accounts often have a touching belief in their ob4ectivity. 3andsomely produced, professionally laid.out, printed on nice.smelling paper, the accounts of most listed companies are an essay in courtship, designed to convince the
reader that here is a company that knows what it is doing and is a worthy place for you to park your money. -easoned investors know different. They know that accounts are full of gaps% guessworand grey areas. 3ow do they get away with it0
,uditors leave company managements considerab#e discretion on how to treat a wide range of items. The impression which accounts give is as much about the 'soft' information as the 'hard' information.
Managers of public companies know that investors like companies that produce steady earnings growth year after year. If managers know that earnings are heading for a short. term dip, it is tempting to prop them up, not by falsifying the figures, but by using various beautification techni*ues. Eor now, it is enough 4ust to flag that all that glitters is not gold.
Profit and oss !ccount This summarises the resu#t of #ast year's trading in figures. It tells you what the company sold, what its costs were, how much profit it made, what the tax charge was, what was left for shareholders, and how much of this is being paid out to them in dividends and how much ploughed back into the company. It also gives comparab#e figures for the previous year. The "#$ supplies many of the hard numbers used in ratio analysis, particularly those relating to operating efficiency. $a#ance Sheet This provides a snapshot of everything the company owes and owns at the end of the financial year in 'uestion. It tells you what its assets are and how they are financed. (here the "#$ tells you how the company has performed in the previous year, the balance sheet reveals things about its fundamental health, like whether it can pay its debts and how good its cash management is.
-ignificance@ if the company is having problems, the balance sheet !together with the cash flow statement% will tell you whether it can stand the strain. 5xample Below are a simplified "#$ account and balance sheet from Marks and -pencer plc's accounts for the year ending &1.&.H*@ Dar-s 3 Spencer p#c Simp#ified profit and #oss account Eear ended 21 Darch 1779 1HH* :m Turnover +ost of sales 9ross profit /ther expenses /perating profit "roperty loss 8et interest income "rofit before tax Tax "rofit after tax Minorities Gividends <A;< .))1C &AH 1)H& AHC .< && H ) .&;; < ) .1 . AA 1HH) :m <*)1 .) )C H) 1)); A*) .1C 1) A*1 . C *CH .1 . *< &
Total interest received was :1A1m of which :11Hm is excluded because it related to the finance activities, leaving :< m relating to trading activities credited to the "#$. The total interest paid was :<<m, of which :&Cm is excluded because it related to the finance activities, leaving : Hm relating to trading activities charged against the "#$. The :&&m credit shown in the "#$ is the difference between the :< m credit and the : Hm debit. Dar-s 3 Spencer p#c Simp#ified ba#ance sheet Eear ended 21 Darch 1779 1HH* :m Total fixed assets Total current assets &&); &<< 1HH) :m &111 ;*)
+urrent liabilities Total assets less current liabilities +reditors over 1 year "rovisions 8et assets +,"IT,$ ,8G ?5-5?>5+alled up share capital -hare premium account ?evaluation reserve "rofit and loss account -hareholders' funds Total capital employed Botes:
1&<) )&) *<H &A &C&* <HH 1H; )** &C; &C1) &C&*
11A1 &HA) *HH ); &&)& <H< 1< )*C ;;H && ) &&)&
1. +urrent liabilities include : )Cm of short term borrowings, and :1C*m of trade creditors . -hort term debtors of :*CAm include :&&m of trade debtors &. 5nd of year stock is &CCm ). -hareholders' funds of &,C1) include 1m of Minority Interests
"rofit margin ?eturn on capital employed -ales as a multiple of capital employed -tockturn Gebt collection "ayment of trade creditors +ash.to.cash cycle
$. )inancia# Ratios
9. Profit margin
Definition: /perating profit as a percentage of sales !or turnover% Significance: "rofit margin tells you about the underlying profitability of a company's trading activities, not whether it is actually making money for shareholders. (a#cu#ation: Multiply operating profit by 1;;, and divide the result by turnover 5xample M#- made an operating profit of :AHCm on a turnover of :<,A;<m. "rofit margin was therefore !AHC x 1;;% 7 <,A;<6 1&.1AI Points to note: "rofit margin is calculated before taking account of interest charges or tax. Eardstic-: Typical margins vary from one business to another, so while 1*I might be good in one industry, it would be considered poor in another.
Multiply operating profit by 1;;, and divide the result by total capital employed. 5xample M#- made an operating profit of :AHCm on total capital employed of :),&) m. ?/+5 was therefore !AHC x 1;;% 7 ),&) 6 ;.<<I Eardstic-: , company's ?/+5 should be higher than the return on gilts !the benchmark for a risk. free investment return%. ,nd unless it is higher than the cost of borrowing, any increase in the company's borrowings or the general level of interest rates will reduce shareholders' earnings.
@. Stoc-turn
Definition: -ales !or turnover% divided by year.end stocks Significance: -tockturn shows how fast a company sells its goods. The higher the figure, the leaner the company. 5xample M#- had sales of :<,A;<m and its year.end stock figure was :&CCm. Its stockturn multiple was therefore 4ust over 1A.;*
Eardstic-: The appropriate figure depends on the type of business, but stockturn is particularly relevant for manufacturing or retailing businesses. ?etailers that are doing well and run efficiently will have a much higher multiple because they should be able to put the burden of carrying stock on their suppliers. ,nother way of looking at stock is to calculate the number of days on average that a company keeps its stock. This is expressed as the year.end stock figure divided by the sales, and multiplied by &<*. 5xample In M#-'s case, !&CC 7 <A;<% x &<* 6 ; days.
7. Debt co##ection
Definition: Trade debtors divided by sales, multiplied by &<* Significance: This shows how many days on average it takes the company to get paid for what it se##s. /bviously, the lower the better. ,n abnormally high figure suggests inefficiency, potential bad debts, window.dressing of the sales figures, or deliberate bullying by large customers trying to improve their own cash management. 8one of that is good news. 5xample The footnote to the M#- balance sheet shows that trade debtors were :&&m. -o the debt collection figure is !&&m x &<*% 7 <A;< 6 1.A days Eardstic-: +ash businesses, including most retailers, should have very low debt collection multiples, because they get their money at the same time as they sell the goods. Typica# target for other non/cash businesses wi## be 9</8< days.
5xample The footnote to the M#- balance sheet shows that trade creditors were :1C*m. -o the calculation is !1C* x &<*% 7 <A;< 6 H.) days. This is actually 'uite 'uick. $ots of large companies use their powerful position to put the s'uee=e on suppliers by holding on to cash as long as possible. Eardstic-: 8o fixed yardsticks here.
(ash/to/(ash days 1+.6 days Eardstic-: +ompanies that receive cash from their customers at the time of sale and that have their stock under good control, will have short cash.to.cash days similar to M#-.
1+. >earing
Definition: Borrowings as a percentage of shareholders' funds !actually, there are lots of variations, but we will concentrate on this one%. Significance: 3igh gearing can be beneficial to shareholders' earnings or very dangerous. "rovided the company's return on capital remains higher than its cost of borrowing, and profits are rising, gearing ensures that pre/ta0 profits wi## increase faster than operating profits. But if the cost of borrowing rises above the return on capital, or if operating profits or profit margins are naturally erratic, high gearing can easily eliminate shareholders' funds in a highly geared company. (a#cu#ation: $ook in the balance sheet for -hort Term +reditors !under +urrent $iabilities% and for +reditors over 1 year, and add them together. Then look for -hareholders' Eunds in the balance sheet. ,llow for ad4ustments !see example below%. 5xample
In M#-'s case, -hort Term +reditors are :1,&<)m, but the footnotes make it clear that of this the -hort Term Borrowings are only : C)m, and that is the figure you want. $onger term borrowings are :*<Hm. -o total borrowings are :A)&m. -hareholders' Eunds, meanwhile, are near the bottom of the balance sheet at :&C1)m, although you do need to add in Minority Interests at : 1m making a total of :&,C&*m. .*CI
Many people would argue that the borrowings figure used should be a net one. By that they mean that you should see how much cash the company has and take that away from the borrowings figure.
M#- had :C&<m cash, and if you took that away from :A)&m borrowings, you get a net figure of :1;Cm which is only .A<I of shareholders' funds.
This shows the impact of gearing on the P3 . If the percentage is high, a small reduction in operating profits, or a rise in the cost of borrowing, can wipe out pre.tax profits. (a#cu#ation: Eind the net interest figure, multiply it by a hundred, and divide the result by the operating profit. 5xample In M#-'s case, the net interest figure is actually positive, because the company received more in interest than it paid out. /n that basis there is no sum to do. But it is often worth calculating the ratio only on interest payments and excluding receipts. In M#-'s case, receipts were :<<m and operating profit was :AHCm, so the calculation would be@ !<< x 1;;% 7 AHC 6 C.&<I If you look at the footnote to the "#$ you can see that :&Cm of the :<<m related to M#-'s financial business. If you want to know the interest cover on the rest of its business, you might want to take the : Hm interest payment instead@ ! Hm x 1;;% 7 AHCm 6 &. &I
5arnings per share &5PS': 5arnings 7 8umber of -hares in Issue The number of shares in issue can be found in the balance sheet, and it will usually also state the average number of shares in issue during the year. Eor more information on the calculation of earnings, see page ) of the tutorial 'Interpreting a -et of ?eports and ,ccounts'.
The "75 tells you how many years you would have to wait to get your money back on your investment. 5xample -o if shares are trading at :&.;; and the 5"- is <;p, the "75 is *. But how meaningful is this0 There is an argument that the P:5 is a f#awed concept because whilst 5"- is based on historical data !actual earnings figures% the current market price of a share is based on future expectations. ,nd since future expectations are only partly determined by past performance the #ogic of a connection between them is tenuous. In determining whether a "75 is 'high' or 'low', compare it with the P:5 for other companies in the same sector.
Price earnings growth factor &P5>': "rospective "75 divided by the estimated future growth in 5"The important thing about the "59 is that both the earnings and the 5"- growth are based on brokers' estimates for the next 1 months. i.e. they are comparing like with like. The "59 rule of thumb is that a company with a "59 of less than one is a bargain. But this is a complicated techni'ue, and if it interests you, take the tutorial '9rowth Investing'.
(a#cu#ation: Gividend per share x 1;; 7 -hare price 5xample p x 1;; 7 1;;p 6 a dividend yield of
Dividend cover Definition: ,t its simplest, earnings per share divided by the dividend per share 5xample If 5"- is Ap and G"- is p, the dividend cover is ).
Price cash f#ow ratio: share price divided by cash flow per share Bet asset va#ue &or boo- va#ue' per share: ordinary shareholders' funds !excluding intangible assets% divided by the number of shares in issue Price to sa#es ratio: share price divided by sales per share, or market capitalisation divided by total sales Price to R3D ratio: market capitalisation divided by ?#G expenditure Price to boo- va#ue: share price divided by asset value or market capitalisation divided by the total net assets Debt:5*uity: net borrowings as a percentage of shareholders' funds
1. By subscribing to various hard copy directories. -ome, like R5)S, published by 3emmington -cott !; ;C )H< ;;**% also have many of the important ratios calculated for you. . By using the services of various websites and online information providers. &. By visiting one of the offices of the Registrar of (ompanies and researching their record
+<. (onc#usion
8umber.crunching alone may not help you pick good shares, but it may stop you from investing in bad ones.
+alculating some basic ratios is a useful way of checking whether shareho#ders' money is being used efficient#y, and it can also reveal problems the management omits to mention. , clean bill of health is like a vet's certificate@ it states that the horse is fit to runF it does not predict that it will win. -o 4ust because a company comes up with flying colours does not mean you should invest in it. Before you do that, you should consider #oo-ing at the wider factors like the general outlook for the industry it is in. Most of the ratios are fairly easy to calculate. -ome attention is needed to notes in accounts, but the more time you spend looking at reports and accounts, the more fami#iar you wi## become with their nuances and subtleties. ?atios work best where they are used comparative#y. ,s far as possible, considering the ratios of companies operating in the same sector, may distinguish the good from the bad.