valuing a company

Valuing a company

1. market share; they company you are buying must be a leader or the coy should be in the position to bring out a product or service to be a brand or market leader. reading the chairman's comments will give you an indication of new plans, competitive environment, threats to the coy etc
2. the market position must translate to sales so read the annual reports, there is a page that has a five year summary usually at the end, sales must have been increasing all these years,if not find out why
3. this sales should lead to Operational Profit (gross profit), ie the proceeds from sales should be able to pay for the operational expense of the company PHCN, Commissions etc, you can also get this from the annual report of the company, it make no sense if the company is borrowing money to pay salaries for five years!
4. ultimately Operational Profit should lead to Net profit, ie the company should also generate enough profits to pay its costs which are not sales related eg government taxes, auditors renumeration, long term investment projects etc, also from our 5 year summary. the coy must be profitable , unless its a new coy in which case you are look at reduced loss each year

5. this then translates into cash generated. a coy can manipulate earning but cant manipulate cash earned, you can get the cash earned from the cash flow statement which in my view is the most important measure of financial strenght. a coy must produce cash to pay salaries, dividends,fuel cars etc. you are looking for surplus cash generated from operation ie total cash flow less operational cash and investing cash flow.
6. cash generated should then be paid to you as dividends, so you are looking at dividends yields. again you will see dividend paid every year for 5 years in the annual report. it will not make sence to you as an investor if the coy makes billions and does not pay you good dividends. however some coy may say we will not pay a dividend but reinvest that money to grow the coy nothing wrong with that, but then the share price must rise to compensate you for not getting cash.
if you get a positive in all these, then they coy seems good. if the trend (market share-sales- operational profit-net profit-cash- dividends) is broken find out why, thats the analysis part. but also look at, Management Quality, Return on Assets and Return on Equity which are all in the annual report, again you want positive figures.

on a last note, a low Price Earning ratio is good, an High Earnings per share is also good, and all these are available in the annual report.