Here’s a quick method of how to quickly evaluate whether a company is good or not, using JOBS as an example.
Now the two criteria I and many other traders use is consistency and growth. So here are the few items I would look at, gleaned from JOB’s P&L:
| Profit and Loss | 2005-12-31 | 2004-12-31 | 2004-06-30 | |||
| Turnover | 54,996 | 34,932 | 16,171 | |||
| Net Proft |
16,371 | 2,414 | 4,039 | |
Okay, next we look at the balance sheet to check that there are no timebombs in the form of huge debts or liabilities.
| BALANCE SHEET | 2005-12-31 | 2004-12-31 | 2004-06-30 |
| NET CURRENT ASSETS | 27,135 |
24,839 |
18,627 |
|
Now if a company cannot show growing numbers like this for the last 2 to 3 years, I would kick it off my watch list as there are too many good companies out there to bet for me to be scraping the barrel for lousy ones. Okay so at this point, I will do a second level check, which involves trying to figure out what management is doing. After all, profits can be fudged and so can balance sheets. My second check involves looking at cashflow.
Gents, cashflow is one of the harder figures in a balance sheet for a company to fudge, because it is literally looking at what money the company has and what it is doing with it. Following money is what criminal investigators, asset tracers and smart investors do.
So for JOBS I can see this:
| Cash Flow | 2005-12-31 | 2004-12-31 | 2004-06-30 | |||
| Operating Activities | 16,572 | 3,628 | 4,564 | |||
| Investing Activities | -11,396 | 12,739 | -1,130 | |||
| Financial Activities | -3,099 | 7,951 | 9,018 | |||
| Cash c/f | 26,558 | 24,401 | 18,008 | |||
From these few figures alone, I can see that this company is cash rich and growing its bank balance. This is important at this particular point in time because companies which are unable to generate as much cash as their competitors will have a problem when times get rough. It is also earning a lot from its core business (operating activities) and reinvesting most of what it earns (classified under Investing Activities). I am not worried about its financial activities which are quite low in relation to their net profits and also because that is usually reserved for things like dividend repayments, stock purchases or servicing debt.
So there you have it. A quick guide to valuing a company. Note however, that just because a company is good does not mean that you should run out and buy it – because its price may not be commensurate with its business, good as it may be. That’s where things like PE ratios come in. Special situation traders (like myself) like to see good companies like this get whacked when times are bad so that we can flock in and pick it up for cheap, somewhere near our preferred accumulation zones.
