In­sight into the health of a com­pany

Finweek English Edition - - Contents - By Si­mon Brown

fA com­pany’s fi­nan­cial re­ports help in­vestors de­cide whether they want to in­vest in it. But a de­lay in pub­lish­ing is a huge red flag, and usu­ally means a lack of ad­e­quate checks within the com­pany.

inan­cial re­port­ing is the cor­ner­stone of in­vest­ing. It’s when the mar­ket as a whole gets to look in­side a busi­ness to see how it is per­form­ing. Rev­enue growth, prof­itabil­ity, cash gen­er­a­tion and a whole range of fi­nan­cial ra­tios can be dis­sected to get an un­der­stand­ing of the com­pany’s health. This, in turn, helps in­vestors de­cide if they want to in­vest, or re­main in­vested, in a stock.

It is for this rea­son that most ex­changes around the world put fairly tight cri­te­ria on the pub­li­ca­tion of these re­sults. In the US, for ex­am­ple, a listed com­pany has to pub­lish re­sults ev­ery quar­ter, which makes it feel as if it’s just a rush from one set of re­sults to an­other.

But I agree that more in­for­ma­tion is al­ways go­ing to be bet­ter than less. The one con­cern around quar­terly re­port­ing is that ex­ec­u­tives be­come far too short-term in their think­ing. Although, re­port­ing ev­ery half-year isn’t go­ing to make much dif­fer­ence to a short-term think­ing ex­ec­u­tive.

In South Africa, the JSE re­quires com­pa­nies to pub­lish re­sults ev­ery six months, at mid-year and at year-end. Com­pa­nies will have dif­fer­ent yearends but most are ei­ther De­cem­ber or Fe­bru­ary, with mid-year then be­ing June or Au­gust.

Fur­ther­more, these re­sults must be pub­lished within three months of the end of that pe­riod. Fail­ure to pub­lish within three months will earn the com­pany a sanc­tion and if the re­sults are not pub­lished within four months, the com­pany’s list­ing on the JSE will be sus­pended un­til such time as the re­sults are pub­lished.

There are al­ways a few of the small- and mid-cap stocks that fail to meet the four-month dead­line, and for me this is a mas­sive red flag. If large, com­plex Top 40 com­pa­nies can pub­lish re­sults twice a year within the re­quired three months, surely it should be easy for the smaller com­pa­nies?

A de­lay in re­sults usu­ally means a lack of sys­tems within the com­pany. This could in­clude sys­tems to spot fraud, man­age the busi­ness and re­sults process, and many more.

A com­pany miss­ing the dead­line be­comes in­sup­port­able for me. If ever a stock I held missed a re­sults dead­line, I would exit it as soon as pos­si­ble.

It is also im­por­tant to un­der­stand that the mid-year re­sults are not au­dited, and of­ten the year-end re­sults are also not au­dited at the time of be­ing pub­lished on Sens. This is per­fectly within the JSE rules. But if the year-end re­sults were unau­dited at pub­li­ca­tion, they still need to be au­dited by a JSErecog­nised au­di­tor and any ad­verse au­dit opin­ion re­ported via Sens.

An­other im­por­tant doc­u­ment re­quired by the JSE list­ing rules is the pub­li­ca­tion of an an­nual re­port.

Re­sults are great and give an in­vestor a lot of in­for­ma­tion to work with. But the an­nual re­port is chock full of in­for­ma­tion and will also al­ways in­clude the full au­dited re­sults.

In the an­nual re­port you’ll get de­tails such as each direc­tor’s hold­ing in the com­pany as well as de­tails of their re­mu­ner­a­tion. The an­nual re­port will also in­clude a lot more in­for­ma­tion on de­pre­ci­a­tion, good­will and val­u­a­tions of the var­i­ous as­sets (es­pe­cially plant, prop­erty and equip­ment) and how the com­pany ap­plies these prin­ci­ples. You’ll also find de­tails on debtors and cred­i­tors as well as po­ten­tial risks fac­ing the com­pany.

As men­tioned, re­sults are pub­lished on Sens, but they will also be on the com­pany’s web­site. As a share­holder, the an­nual re­port will be posted to you (un­less you re­quest the com­pany to save trees and not bother post­ing it). The an­nual re­port is also avail­able on­line to any­one, in­vestor or not, and this is where I read them. ■ ed­i­to­rial@fin­

If ever a stock I held missed a re­sults dead­line, I would exit it as soon as pos­si­ble.

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