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Reading financial reports

  • 25-09-2010 7:59pm
    #1
    RoadKillTs
    Closed Accounts Posts: 1,710 ✭✭✭


    Hi,

    Well I gave FX a go but speculating isn't for me so time to blow the dust of my copy of "Security Analysis". :)

    Can anyone give me some pointers when it comes to reading Financial reports?
    What are the main things to look out for?

    On a separate note I am thinking of investing in Diageo. The numbers look good.
    Plenty of cash, has a consistently high gross profit margin. Has a fair bit of debt though which is a bit of a concern.


Comments

  • #2
    soddy1979
    Registered Users, Registered Users 2 Posts: 284 ✭✭soddy1979


    You definitely want to look at cash flow. It might be low for early stage companies, but you need to be sure that the firm will start generating free cash flow at some stage.

    You should also look at leverage, as this increases risk to equity holders. Also keep an eye out for warning signs such as barter transactions.


  • #3
    RoadKillTs
    Closed Accounts Posts: 1,710 ✭✭✭RoadKillTs


    Thanks Soddy.

    Do you mind me asking what you mean by barter transactions?


  • #4
    soddy1979
    Registered Users, Registered Users 2 Posts: 284 ✭✭soddy1979


    Hi,

    Barter transactions are essentially swaps of goods and services. If a company is continually engaged in this type of activity, they can't have enough cash to back up their revenue.

    You can also decompose their ROE using the DuPont method. It will be useful for you to understand how the company is making their profit.

    Here is a link.

    http://en.wikipedia.org/wiki/DuPont_analysis


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