Monday, February 28, 2011

How do you trace a problem that may appear in the stock you buy?

As in any investment, I always recommend you to do homework - be it investment into properties, stocks or even cars. Have you ever heard of property investors losing money in houses that they have bought which the developer did not complete - example some of the properties that Talam built, just to name one of them. The tip is if you ask around or look at Talam's books before making that decision to buy, you may end up not taking that risk, as they may not have the funds to finish a project.

Tonight, I was looking through announcements on Bursa since this is the final day for companies that have either March, June, Sep and Dec year-end to announce their quarterly results. What pissed me off is that as I was glancing through one of the companies that I remember approached me to raise some funds few years ago - I knew their numbers may not be real, during then. I know that these companies through accounting loopholes or rather the eagerness of their auditors to just earn fees. Or rather too many inexperience auditors around, allow this things to go through!

Here I am showing a simple example (from that company I mentioned), but yet many investors just fall into that trap.

Just look at the trend, nice results from FY2005 to FY2008, showing a healthy trend in its P&L. Then came FY2009, it shows a sudden loss (you may think probably due to the crisis.) Well I do not think so. Look further! The balance sheet or a cashflow trend would probably tell you the answer. (I normally treat P&L as the last thing to look at - however, not for all companies though.)

True enough, if you look at the receivables it is more that 1.5 times of the revenue preceding year. Total revenue last year was around RM160 million while the receivables was RM257 million. Now tell me what type of company cannot collect its debt that is already more than 1-1/2 years on average. Or probably this company will not be able to collect that debt, anyway. They could just be playing with the auditors, as these revenue were never there anyway. If it can collect, I would not be investing into a company that has poor collection record, anyway. Another big number if you noticed is the "amount due from customer for contract work" - RM360 million. I wonder who is their auditor? BDO. Not a big four, but large enough to have that probing mind among their partners.
(Well, I am not going to name this company, but this is a post to allow you not to fall into this trap. This company was enjoying a run in its share price from 2005 to 2009 - Some people may already have fallen into their trap.)

1 comment:

Sunny said...

It is sad to see people being cheated. There are too many investors buy something that they do not know except the prices. As for me, the pain of losing money is so real that it hurts me before I am actually losing the money. That's why I am a SERIOUS investor who read reports too.