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Advice on Fundamentals

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piggybank

Joined
4 October 2012
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Hi,

It appears many people have conflicting views on what they see as the most important data to use when deciding whether a company shares are worth buying - usually when the stock's chart is telling you it is a "buy".

Below I have attached 3 images of a stock that I won't mention at this time, but its volume each day runs into the millions!!

I would appreciate it (as I'm sure others would who like me) don't have much knowledge of what the various numbers mean. Like I hear people saying if the P/E number is above 20, then unless the company has proven it has the ability to keep growing then you should avoid it? Does the dilution of the shares (as is the case with this stock) mean it should be avoided like the plague?

Thanking those in advance of their replies.

Regards
PB

P.S. If you have trouble reading the attachments, then just click on the image and it will open (larger) in another window.





 
Re: Advice On Fundamentals...

Looks like VMT. I personally avoid stocks like this because they're entirely speculative on a fundamental basis and most people base their predictions on pure hope.

This company hasn't ever been profitable. Whilst history doesn't always repeat it often rhymes... and my risk management instincts say that until there is some sort of implicit indication of long term profitability and competitive advantage I wouldn't touch it.

Price action - will be volatile, because the unknown quantity of future earnings is highly debatable at this stage. Dreamers vs pessimists. Operating leverage and arguments for future profitability are easy to make when there are no large fish (ie. major fundies involved) and the potential outcomes have a very wide range.
 
Re: Advice On Fundamentals...

The P/E ratio isn't very useful in valuing companies. It can be useful for comparing what people are willing to pay for companies in the same sector e.g. we might compare the P/E of WOW to WES and it shows people might be willing to pay more for one than the other. Both companies might be overvalued or undervalued though.

As for the data you linked, there is a usual disclaimer about this not being investment advice but rather you asking for an explanation of the data for purely educational purposes.

On the basis of this data, this company looks in very bad shape.

A few things. Firstly, Revenue is dropping. This means the company has less money coming in. It's been dropping for years. The company has never paid income tax which means it's never made a profit. We then look further and the news gets worse, our fears are confirmed as the company has not made any money since 2004. Shareholders equity is dropping at startling rates. This means the money shareholders have put into this company is gone. Return on equity and return on capital are negative. You wouldn't accept a negative interest rate from a bank so a negative return on your money you put in is clearly terrible.

We keep going down and see our EBITDA and EBIT in the negatives. These are fancy terms that management use to mislead investors when they report earnings. The issue is this company is losing so much money at such a fast rate that they can't use this trick. If they reported EBITDA they would still be losing money.

Cash flow is negative and has been for most of the company's existence. This is extremely bad. Any company that has year on years of losses and negative cash flow must go bankrupt. There is no way this company can survive unless shareholders keep pouring money in. Oh wait! Shares on issue have gone up year on year. There was a big capital raising between 2011 and 2012. Hundreds of millions of shares were issued to keep the company afloat. However, this company must simply go bankrupt given time unless a miracle happens like they strike gold or oil or whatever other crap they might be searching for.

Book value and NTA (Net Tangible Assets) just confirms they have no assets. Debt/equity ratio shows they have a lot of debt and likely no way to pay it back. Notice how our EBIT being earnings before interest and tax is 1.04 but our total loss is 11.7. Since this company isn't paying tax, almost all their losses must be from interest repayments. The net interest cover, being a ratio showing if a company can meet it's repayment obligations (it's worse the lower it is - under 1.5 is a sign of imminent bankruptcy), has gotten significantly lower since last year which is consistent with much more debt being taken on. The company has a lot of cash on hand and therefore looks like it can service this debt for a little while, depending on how much it loses on operations and how much more money shareholders are willing to lose.
 
No idea what it is but they have up until this point lost money and looking at the shares issued it seems they keep on asking shareholders gor more money. Next.

Not something I would invest in.
 
Yea it pretty much boils down to the company losing the money, asking for more, losing that, asking for more and repeating. It's like a drug user or a gambler.
 
My guess is this business has a exciting story to tell like a revolutionary technology or just about to crack a large market otherwise shareholders wouldn't keep on shoveling money in. The trouble is if/whenever the results come the dilution will be so massive...
 
Re: Advice On Fundamentals...

Valued said:
As for the data you linked, there is a usual disclaimer about this not being investment advice but rather you asking for an explanation of the data for purely educational purposes.
Click to expand...

Hi Valued,

Thank you for hitting the nail on the head by stating this was purely for educational purposes nothing in regards to whether this company was worth buying or not. Maybe I should put up the same 3 tables but of a successful company i.e. CBA as a comparison to this less successful company so far?

I was hoping for a larger response in helping those (including myself) who don't have much experience on understanding and what to look for to avoid buying a doozy and losing a lot of money along the way.

Regards
PB
 
In addition to the question of outright profitability and the balance sheet, there is also the question of risk if we're talking about a long term investment based on fundamentals.

1. Is the company actually making a profit? And is this profit increasing over time?

2. If the company is not profitable, is there a credible, verifiable reason that would cause them to become profitable in the foreseeable future? This needs to be something firm, eg they are actually building a factory or developing a mine or whatever, and not simply speculation that it might happen someday.

If the answer to both of the above is no, then it is essentially a speculative investment at best.

3. Is the underlying industry itself growing or at least stable?

4. Are the company's operations reasonably sustainable? Eg an oil company (for example) needs to be actively exploring for more oil, otherwise a point comes where they've extracted all they have and are out of business.

5. Is there anything about the company or industry which makes it particularly risky? Eg the company does something specific and sells its entire production to a single customer with nobody else around who has a use for it? Is the industry subject to political interference? Is the company reliant on a small number of contracts with a credible prospect that they won't be renewed? Do they have a substantial part of their operations in a country where war is foreseeable? Are they heavily or even totally dependent on a single asset for their income?

6. Have other companies operating in the same industry been profitable? Or is it an industry where profits tend to be minimal and with a history of companies going broke? If so, does the particular company actually have a sustainable advantage over their rivals?

7. Has anything changed, or is about to change, which significantly affects the company's management? Eg resignation of multiple board members or a CEO who has driven major growth but who is approaching a likely retirement age?

8. Are the company's products subject to changes in fashion in a manner that the company would struggle to cope with?

9. Does everything seem OK with the company's financials?

10. Is there anything about the financials, key people (board or CEO) or the way the company conducts business which arouses suspicion? If so, trust your instincts.

That's not a full list but they are all things I tend to look at when making a long term significant investment based on fundamentals of the company. Just because it makes a profit now doesn't necessarily mean that they will keep doing so.

I should add that you can also manage some of those risks within the portfolio rather than excluding them as such. Eg if you own shares in an oil company then that's a natural hedge against fuel prices if you also own shares in a transport company.

Another thing is that I like to understand what the company's business actually is. Eg I can understand what Woolworths, BHP or Santos does whereas there are some companies who don't seem to know what they are actually trying to do. If the board and CEO doesn't know what business they're actually in, then suffice to say I'd rather leave my money in a bank that a least pays a bit of interest (and where the board and CEO understands that they're running a bank).
 
Valued said:
Yea it pretty much boils down to the company losing the money, asking for more, losing that, asking for more and repeating. It's like a drug user or a gambler.
Click to expand...

No clue tells me it is a company that is losing money.

It may be expending money.
I would need the narrative.
What the company does!
Where it is doing these things etc., ...

Is it near the grid, public transport, the shops?
Does it have a moat?


A quarterly report would be heaps handy.


Oh. And a 10 year share price chart.
(with or without arbitrary lines of red, maroon or blue)
 

Sorry? It's clearly losing money. It's there in the data ambiguously. Find me a company with a sheet like that who started making money. If it were spending money we would expect NTA or capital spending to be on the rise but they are going down. We would expect shareholders equity to increase not decrease. They are not. Now it might be that they conduct some form of medical research but then they are still just spending money hoping to land a home run. The company is just losing more and more until they do. It's just another version of a mining exploration company. Highly speculative and risky.
 
burglar said:
No clue tells me it is a company that is losing money
Click to expand...

It may be expending money.
I would need the narrative.
What the company does!
Where it is doing these things etc., ...

Is it near the grid, public transport, the shops?

Does it have a moat? - I don't think any of their premises/offices are within a castle!!

A quarterly report would be heaps handy.

This is a document of a presentation on the 22nd October last year:- http://stocknessmonster.com/news-item?S=VMT&E=ASX&N=653486

And a quarterly report for September:- http://stocknessmonster.com/news-item?S=VMT&E=ASX&N=655119

Oh. And a 10 year share price chart. (with or without arbitrary lines of red, maroon or blue) Click on image for a larger view.



I hope this is ok Burgler?

Cheers
PB
 
Well Ves was on the money! VMT came across my universe of shares a while ago, it didnt take much research to ditch it.
 
Hi piggybank,

piggybank said:
... Does it have a moat? - I don't think any of their premises/offices are within a castle!! ...
Click to expand...


Definition of 'Economic Moat'

The competitive advantage that one company has over other companies in the same industry. This term was coined by renowned investor Warren Buffett.
Click to expand...



piggybank said:
... Oh. And a 10 year share price chart. (with or without arbitrary lines of red, maroon or blue) Click on image for a larger view.

View attachment 56273

... I hope this is ok Burgler?
Click to expand...

Yes, ... Lovely! (And that's burglar with lower case b)

Reason I asked for a ten year Chart:
a.) I want to see if it has been around for longer than ten years, i.e. through the GFC
b.) I want to gauge shareholder sentiment (at least on entry and exit)
 
Valued said:
I did a quick google search and could only find data from 10 years back (that doesn't involve me spending considerable time reading annual reports). They have been making money for the last 10 years at least.
Click to expand...



That chart was the famous "Johnson & Johnson" which we all should have bought at IPO.
I was funning with you guys! :


VMoto makes a very attractive scooter.
The electric version should do well.
They need to be the first, finest or cheapest to succeed.

 
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