Posting # 9. – Price Earning ratio and EBITDA.

General - TIKL Blog

Price Earning ratio and EBITDA.
(EBITDA – Earnings before Interest, Tax, Depreciation and Amortization.)

PE ratio is widely used by stocks analyst in their recommendations to highlight the attractiveness  of certain securities they are promoting. Personally, I avoid this indicator because the price is current that changes virtually with every trading seconds and the earning numbers is at best three months old. You will also notice I do not make reference to it in my Posting # 8.
My term of reference of this posting is based on two articles  related to PE ratio & EBITDA according to Warren Buffer, Charlie Munger and Seth Klarman.

Digressing a bit, in Posting # 8, I have included a pdf document titled “Warren Buffett Interprets Financial Statements”. This document allowed me to design my stock analysis check list which I posted along with Posting # 8.

I have done an analysis of the Malaysian stocks using the template covering more than 120 companies spread over 25 industrial sectors in late 2015. I have noticed counters obtaining high scores using the template have so far performed well except for the Oil & Gas and Oil Palm counters which are affected by their cyclical nature.

Another way of looking at the result from such a study is to look for those counters that scored well according to the template but the price remained stagnant. Such counters are possibly going through a “Price & Value divergence”. I am prepared to share the detailed information with anyone who desires to know more.

Buffet wrote in his year 2000 Berkshire Hathaway annual report to shareholders wrote that “Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business”.

Buffett’s Thoughts on EBITDA?
We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report.
People who use EBITDA are either trying to con you or they’re conning themselves. Telecoms, for example, spend every dime that’s coming in. Interest and taxes are real costs.

Seth Klarman on EBITDA from his Book Margin of Safety.
A Flawed Definition of Cash Flow, EBITDA, Leads to Overvaluation.
EBITDA Analysis Obscures the Difference between Good and Bad Businesses.

For better understanding of this posting, please go to Buffett_PE ratio not for valuation-a  & Buffett, Munger and Klarman’s thoughts and explanations on EBITDA. Pdf attached.

Attachment : Buffett_PE ratio not for valuation-a, EBITDA_Buffer_Munger_Klarman

Happy reading,

Tan Nai Seng

Joints Pain Mitigation – Especially for Senior Citizens.

General - TIKL Blog

This article is to complement the “Aches everywhere, especially at joints. Fix it!” article posted by Kim-Teck Ang on July 19th, 2016.

I have a friend (true name Major Munu) who have been suffering from severe pain at the knee for some considerable time. To his delight he discovered that taking gelatin helped him to overcome his predicament and he is now able to walk 9 holes without discomfort. He was on bovine gelatin for two months.

A 72 year old Korean lady ardent golfer who walks nine to fifteen (yes 15 and not 18) holes with her husband five times weekly has stopped complaining about knee pain after religiously taking about 30 to 50 grams of Eucheuma Seaweed for two weeks. She had been putting off her doctor’s recommendation to go knee replacement for several years now. Now she include the seaweed in her daily diet. For testimony, her name is Mrs Lee C.G. Kelab Golf Rahman Putra membership is WG0005.

The common denominator here is gelatin. And the pure unadulterated natural form I am aware of is Eucheuma seaweed or more commonly known as sea bird nest. I am also starting on it to retard natural degeneration due to ageing.

You can Google sea bird nest and there are sufficient articles to go through including information on preparation and food dishes suggestions.

I also enclose an extracted information to introduce the product which is readily available in the market. There are three types, pinkish, whitish and yellowish and the pinkish being of higher quality sells for RM22/- per kilo. The other two grades go for RM20/- per kg.

Attachment:- Sea Bird Nest

Happy reading,
Tan Nai Seng

Sample of Statistics – US Unemployment Rate

Business Culture & Behaviour

How is it that in a month it was reported that 200,000 jobs created and in the following month only 10,000 jobs were created? This is the kind of statistics that were provided to the public – KTAng observation.

Quote:
“The USA government calculates unemployment mainly by counting the number of people receiving unemployment benefits. So when people’s benefits expire, they are no longer counted… and the unemployment rate actually falls! It really is ridiculous.”
Assumption: The drop-out of unemployment numbers would be possibly added into the jobs created category.

But the reality is, the true unemployment rate is much, much higher than what the government is reporting.
KTAng Quote : Unrealistic Truth. The rational is this; when people are not unemployed, they must be considered to be employed. So moved these numbers to jobs created. Mathematical Logic, is it not? Lao Tze : Back exists, there must be a Front.

World Financial Crisis – after GFC ??

Business Culture & Behaviour

Quote : “The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. Actions by Chinese policymakers are supporting the near-term growth outlook, but the underlying pace of China’s growth appears to be moderating.”

What does all that make out for us all, humans? So, read between the lines. Where are the facts and statistics?  Well, there are many reports out there for you to look at. But each is worded differently, rather ambiguously and even ridiculously from another with puzzling effect to a person. So what is happening to the real World Economy?

Some large economy countries are still going around sabotaging up-coming budding economy countries?  Why is that?  Is that intentional for economy advantage or is it a political interventions of other countries or military power supremacy stance or what?

Make your guess, fellow members.  My guess is that the World is growing at less than 1% – or near zero growth and that is why several countries has gone bankrupt and the larger countries, guaranteed by their mighty power, are able to print large quantity of money (currently termed ‘Quantitative Easing Program” – a financial tool !!) to get by.  Hope we all will have a safe financial journey.

Japan – new ‘Paper Tiger’ finance Tool

Business

The Japan Government has announced that it is applying the financial tool and is called ‘Quantitative Easing’ for the next 4 years. Each year (from 2016) the printing of money will begin at the rate of US$58-Billion to assist Japanese businesses, especially the very large scale ones, for example, Mitsubishi Corporation, in assisting them to compete overseas. The total additional printed money will be equal to a quarter of a trillion US$ in the four years ahead. It is also to stimulate the Japan economy, by lifting the inflation rate. The problem is that ordinary citizens hate high inflation lifts – because it simply dilute their savings, (income) wages and salaries. This is in line with Capitalists’ principal of growth of monetary wealth but in contradictory to workers’ dreams of wealth build by hard-work and savings.

Posting # 8 – My Understanding of Fundamental Analysis

General - TIKL Blog, Investments - Public Stock Market

My Understanding of Fundamental Analysis

Every company have to prepare and submit an annual account to the authorities and the shareholders. Listed companies usually include the documents in the annual report.

The annual account or Financial Statement consist of the Balance Sheet, the Income Statement (Profit & Loss) and the Cash Flow Statement. Learning to understand what those numbers means will take some effort but not prohibitive to a layman. I recommend “Key Management Ratio” by Ciaran Walsh as a good reference to understanding the financial statements.

Warren Buffet once said “Accounting is the language of business. If you do not understand accounting do not invest yourself or go into business”, unquote.

Without wasting time to reinvent wheels I borrowed the idea from Uncovering How Buffett Interprets the Financial Statements, http://www.oldschoolvalue.com/blog/tutorial/this-is-how-buffett-interprets-financial-statements/ and apply those metrics that I feel serves my purpose in a time-series excel table to back test the financial numbers of those companies I wish to understand in some detail. In a nut-shell, the metrics I use are listed below.

1. Gross profit margin – consistent over the years.
2. Low Sales, General & Administrative expenses (SG&A) as a
percent of gross profit.
3. Low depreciation to gross profits percentage.
4. Low companies Interest Expense to operating income preferred.
5. Consistent Net earnings and preferably growing over the years.
6. Healthy cash and cash equivalents.
7. Inventory level commensurable with turnover.
8. Manageable net receivables.
9. Investment in Property, Plant and Equipment well contained.
10. Assets & Return on total assets.
11. Low or no Long-term debt i.e. bank loans.
12. Low total liabilities-and-debt-to-shareholders equity ratio.
13. Retained Earnings in a growing trend.
14. Healthy Free Cash Flow.
Notice there is no mention on Return on Equity and PE ratio. I will come to that at a later posting.

A pdf copy of Warren Buffet Interpret Financial Statements is also included in this posting to make it easier for the reader to refer to it.

I am also attaching my sample analysis of HUPSENG INDUSTRIES BHD using the above metrics in a tabulated format and to rate the companies using the following documents:
HUPSENG Financial Statements.pdf
HUPSENG BUFFET ANALYSIS.PDF
HUPSENG Business Performance Chart.pdf
HUPSENG 10 yrs Price Chart.pdf

Some readers may feel this posting is not professional enough because there is no mention about “Discounted Cash Flow” and some other high sounding accounting jargon.

I use to go into intrinsic value, Piotroski F-Score, Greenblatt analysis and even intrinsic studies but finally I decide on “KISS”. KISS stands for Keep It Simple Stupid.

I wish to reiterate that there is no fixed or sure fire method to make money in the stock market. Any method that can increase my margin of safety and help me grow my portfolio value now and then, to me, is a good method. I am not trying to sell anything, I am just sharing what have serve me well and if anyone feels this sharing can be of some use to them, by all means go ahead.

Comments and input that may add value to this posting or facilitate a better understanding of this sharing are most welcomed.

Attachment as follows:

Warren Buffet Interpret Financial Statements., HUPSENG_Financial Statements HUPSENG_BUFFET ANALYSIS, HUPSENG Business Performance Chart,  HupSeng 10 yrs Price Chart

Happy reading,
Tan Nai Seng

Posting # 7 Outlook for KLCI, STI and Hang Seng

Investments - Public Stock Market

Outlook for KLCI, STI and Hang Seng

Chart of KLCI_SGX-STI_HangSeng

In my posting number 6, I brought up the subject of Fundamental and Technical Analysis. Doing a fundamental analysis of a market index requires access to resource not readily available to the public. Analyst from different investment banks (they have the resource) do publish article about market outlook. As far as I am concerned, their articles usually trail the events.

How can retail investors get a feel of where the market is heading. The answer is Technical Analysis. I have included a pdf chart of the three market with this posting. One interesting feature of the charts is, all the three market turn bearish during the first quarter of 2015. This is a classic depiction of “a picture is better than a thousand words”. For the uninitiated, charts are meaningless.

You will notice that the three markets have been oscillating within the two parallel green lines. It is good enough to understand that this scenario is caused by the bulls and the bears trying to exert their influence. What causes the bulls and bears to behave in such a manner requires an understanding of macro-economics and actions by market makers.

Suffice for us to understand that when the bull temporary dominates, the vertical bars will pierce above the top green line. Likewise, if the bears are in command, the bars will drop below the bottom green line. The blue horizontal lines are the various support and resistance levels. For our purpose the trend is the only determinant for taking action.

How can one know when the trend is bullish (you want to make money)? Do not expect to see an uninterrupted ascending bar. There will be intermittent downwards retracement. This is expected because of the effect of taking profits and cutting losses depending on the market player entry point.

Based on the charts, it is unwise to bet big for the moment. Those who have positions, remember to liquidate when your profit targets are met. You only make money after you have liquidated. How about going long term? It depends on your risk appetite and your strategy. One can only hope but cannot predict what tomorrow will bring. However if you understand how trends develop with the different indicators in synch, you stand a better chance of increasing your margin of safety.

I do not advocate totally ignoring fundamental analysis. Fundamental analysis enable us to spot growth companies. Technical analysis complements fundamental analysis for entry and exit.

Happy reading,

Tan Nai Seng