Cash Flow Statement

Cash flow measures cash. It tells how much of money the company took in and paid out during the financial period usually divided into three sections: Cash flow from operations, their investing and their financing.

In Hong Xing case, all three sections are negative, showing outflow of cash of 574M. This is not good for investors.

1) The main concern is the 880M prepayment, deposit and other receivables which is 300% higher than previous year.

Look at previous year, both cash flow from operations and financing were positive resulting a in flow of cash of 2B.

2) The other concern is: 2008 has left only 1.982B cash for 2009, and if company needs additional money, it looks like it needs to get loan. Loan is expensive and it will affect profit in future.

Balance Sheet

Balance sheet tells you the value of the things that a company owns and the amount it owes.

Using China Hong Xing as a example.

The things it owns: Assets= RMB4.4B

The things it owes: Liabilities and stockholders' equity = RMB4.4B

And, in balance sheet, Assets must = Liabilities + stockholders' equity.

Assets include cash, receivables, inventories (current assets=3.7B ), equipment and property (fixed assets) and land use right (Intangible assets, total non-current assets= 0.7B) etc.

Liabilities (Which is = 542M) mean account payable, accrued liabilities (Current liabilities = 271M), deferred taxes and rent (Long term liabilities or non-current liabilities = 271M).

From balance sheet, we know:

1) ROE = net profit / equity = 0.515/3.9B = 13.2%

Stockholders' equity(=3.9B) refers to capital paid and retained earning.

2) NAV = Total assets - liabilities and preference capital / #ordinary shares
NAV per share = 4.4B - 0.54B / 2.54B = RMB 0.152

3) Trade receivable of 478M which is higher than attributable net profit of 445M. Do you want to invest in a company that has such high Debt/Profit ratio of 1.07 (478/445)? If tomorrow all these debt cannot be collected, the company will declare loss.

4) Prepayment, deposit and other receivables are 4oo% (1.16B) higher than previous year (278M). What if all these receivable not collected next year?

5) Bank and cash balance have depleted by 25% to 1.98B from previous 2.65B. Somewhere in the report said that the previous 2.6B was raised through share placement and this was done when the share price hit around S$1. Who would invest at this time when the share is less than S$0.20.

Income statement

This income statement tells if a company is making money (Profitable) or not (Loss money).

The above is the the most recent income statement of China Hong Xing for FY2008. It shows that the company has made a net profit after tax of RMB448.5M for FY2008.

We observe that:

1) The profit is higher by 7.7% than last year's 416.453M.

2) This is not proportional to the growth rate of its revenue and gross profit. Revenue grew by 41% and GP, 35%. Why? Because the expenses are very high.

3) While revenue has increased by 41%, COG has also gone up even higher by 45%, resulting slightly lower GP growth rate.

4) Selling, distribution and admin expenses were up much faster by 55% - 68%, eroding profit although financial expenses has reduced by 21%.

5) Further, provision of income tax expenses have doubled.

Income statement tells us China Hong Xing is a profitable company with good growth records (If we have previous years' revenue to show) and probably better growth opportunity (If the company can show us its projections) in future. It also tells us it would have performed better with more tighter cost control.

Of course, the expenses have gone up probably due to higher cost of distribution and promotion to counter keener market competition.

Usually, there would be some details in the financial report about what and how these revenue and expenses incurred. In Hong Xing case, they said:

1) their high growth of revenue was due to increase in retail network to 3800 outlets, improved product mix and higher selling price,

2) higher trade discount to distributors resulting in lower GP,

3) the higher selling and admin expenses were needed for brand promotion and loss in currency exchange rate, higher salary and higher depreciation provided in line with business expansion,

It further tells about the new PRC tax requirements and how if it will affect income statement.

Of course, as a share holder, you can further probe into details of operations from the income statement to inquire how the management can improve the business. But, do you really want to know so much about the operations? It might prove to be too troublesome if your objective is just want to "buy low sell high"?

One very important indicator that can be derived from income statement is the ratio between profit and shares outstanding, i.e. EPS - which can be seen here.

Financial reports

There are three financial reports that are made available to investors, namely:

1. Income statement
2. Balance sheet
3. Cash flow statement

Income statement tells you whether a company operated at a profit or a loss for the financial period. It does not measure how much the money a company received and paid during the financial period.

Balance sheet tells you the value of things a company owns and the amounts it owes on a single day, usually on the last day of the reporting period.

Cash flow statement measures cash, it tells you how much of cash a company took in and paid out during the period.

Watch list

Name -----------------TargetBuy -----------TargetSell

China Sky -------------0.20 ---------------- 0.25
China Sport -----------0.12 (PE:2.4)--------->0.15
China HongX----------0.11(PE:3)-------------0.15
Cacola----------------0.065 (PE:1)----------- 0.10
China Essence -------- 0.225 (PE:1.66) ------0.30
China Eratat----------0.075

China Eratat - 2

The Q3 results announced yesterday was a good one.

- Revenue till Q3 has increased by 92% to 610M(RMB) compared to last year's 318M.
- Profit after tax: increased by 93% to 100M.

This has improved EPS to RMB0.24 (414M/100M, or S$0.053)) from previous RMB0.146 (60/414).

Last week's price now was S$0.095.

The PE is considered low as compared to China Hong Xing's 6.6.

If we use PE=3, then, there should be a upsize to S$0.159 (S$0.053 x 3) which is a substantial increase of at least 1.5 times (0.159/0.095) of today's value.

Buy now or regret.

NAV

NAV, Net Asset Value per share, 每股净资产值也。

Calculation:

[Total assets less (liabilities + preference capital)] / Number of shares ordinary outstanding

NAV是个理论上的价值。即：以Balance Sheet上的价值，将公司全部资产变卖，后付还公司全部负债，所剩的就是净资产值 NAV。然后，再除于全部发行股份，就是每股份之NAV。

NAV tells you something about a company, i.e. Should the company collapse, this is the potential amount of value left in the share. But, can the NAV value be released? We dont know. Because, the value of NAV is based on the value in the balance sheet and not the actual value on sale. Also, can all assets be released? E.g. Can all debt be recoverred? Can all fixed assets be sold at the value recorded in the balance sheet?

So, unless you further examine each item in the balance sheet, NAV remains a theoritical value to you.

Despite of this, NAV, however, is still a useful indicator for investors in so far as "is the share price I am paying for higher than net asset value" of a company is concerned.