You need to know two numbers:
a. profit after tax (before minority interest, if any)
b. depreciation
That’s all for Step 1.
Problems you might encounter:
The quarterly report format approved by Malaysian Accounting Standards Board (“MASB”) took a step backward that the disclosure of depreciation can be avoided. MASB allows CONDENSED Cash Flow Statement that can hide many important breakdowns. It is frustrating considering the importance of depreciation to estimate owner’s earning (as per Warren Buffett’s methodology) and to understand cash flow. However, most decent companies still disclose depreciation voluntarily in their quarterly report announced to Bursa Malaysia.Skip this part if you are familiar with financial reports. For novice only:
If the depreciation number is not available in the quarter report, you can estimate the number from their previous financial year annual report. It should not run too far under normal circumstances.
If you are reading annual report, the comparing balance sheets are that of the current year end and preceding year end. The profit and depreciation figures are of the current year.
If you are reading quarterly report to find out quarterly performance, the comparing balance sheets are that of the current quarter end and preceding quarter end. The profit and depreciation figures are of the current quarter.
If you are reading quarterly report to find out year-to-date (for instance, three quarters) performance, the comparing balance sheets are that of the quarter end and preceding year end. The profit and depreciation figures are of the year-to-date ended at current quarter end.
Part 1: Reading financial statements
Part 2: The principle of profit manipulation
Part 3: Detecting profit manipulation - Overview
- Step 1 - Net profit and depreciation
- Step 2 - Net cash or debt movements
- Step 3 - Stocks add trade debtors less trade creditors
- Step 4 - Capital expenditure, goodwill, tax and dividends
- Step 5 - Other debtors and creditors
- Concluding Steps
