Quick Fundamental Analysis

If you have been through most of my website, you may notice that I didn't write a lot on fundamental analysis for Singapore stocks.

However, fundamental screening is an important part of my stock selection process.

It's very important to understand fundamental analysis because most of the big players in the stock market look at them. It also helps me to sleep at night knowing that my capital is invested in a fundamentally sound company.

Fundamental analysis for me consist of 2 parts

  • Recent financial performance and
  • Recent/ upcoming company specific news

Recent Financial Performance

If you've never gone through a financial statement of a Singapore listed company before, don't worry too much as the structure is pretty standard.

For my fundamental screening, I only look at certain sections. These are

  • Section 1(a) - Income statement
  • Section 1(b)(i) - Balance Sheet 
  • Section 1(b)(ii) - Debt repayable
  • Section 1(c) - Cash flow statement
  • Section 6 - Earnings per share
  • Section 7 - Net Asset Value

Below I will break down what I want to see from each section. Some of my conclusions may not be standard accountancy.

Section 1(a) - Income statement

I look for a profit increase combined with an increase in revenue. Typically an increase in profit without a proportionate increase in revenue may indicate that the 'growth' in earnings may just be due to a decrease in operating expenses or a one-off gain that's probably not repeatable in the near future.

Section 1(b)(i) - Balance Sheet & Section 1(b)(ii) - Debt repayable

Here I look for cash in bank or current cash/ cash deposits in the balance sheet and I use this figure to subtract the debt repayable within 1 year. 

This is important for me because companies short of cash may come up with creative debt financing and the most common one is 'rights issue'. Most of the time, a rights issue announced tend to cause the stock price to gap lower because of a lower offering price and impending share dilution.

Section 1(c) - Cash flow statement

In this section, the operating cash flow has to be positive. If the income statement is showing a profit but the business is not generating a positive cash flow, it could be a 'creative accounting' profit or the business is too complicated for me to understand.

And I tend to give more weight to this section because my accounting teacher back in the day says it's important and it has stuck in my mind for the longest time.

Section 6 - Earnings per share

There's no doubt for me that earnings and stock prices move in tandem. Compared to the income statement, this section takes into account any share dilution and hence shows a clearer picture for the earnings trend.

An acceleration in the earnings per share compared to previous quarters may signal a similar move in share price and vice versa.

From my experience, even after a spike in the share price due to an acceleration in earnings, the stock price may continue going higher in anticipation of continued improvement in earnings and big players supporting the share price as they accumulate their position.

Section 7 - Net Asset Value

I look at this section not because I care about the number but because I know there will be 'bargain hunters' looking for undervalued stocks.

It's good to know there will be buyers to support the share price when it goes lower and buy from me when I want to cut my losses because undervalued shares can get even 'more undervalued', if you know what I mean.

Recent/ Upcoming Company Specific News

As the financial reporting of most Singapore listed companies come out once every quarter, there's not much to analyze for a couple of months ahead. However, news that can have a fundamental impact on a company can be released at anytime.

So after investing in a company, it's important for the investor to keep track of the company announcements from the SGX website every day. Yes, everyday. If you don't have the time, your money will flow to people who have the time.

Some examples of company specific news that may positively affect share prices are bonus issue, special dividend, takeover interest, gain from sale of investment assets, etc.

Some examples of company specific news that may negatively affect share prices are rights issue, profit warning, discounted share placement, resignation of CEO or CFO, fraud by company employee, etc.

As you can see, there's a lot of information to process and since I keep track of all the 700+ companies listed on SGX, I learned to use Microsoft Excel effectively to manage the data for free by utilizing my Skillsfutures credit.

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