Part
3
Evaluating the performance of your
company
My previous two articles in this three-part series focused on ratio
analysis, which is an important component of corporate performance
appraisal. In this article we will be looking at two factors, which
should also be considered by an investor. The factors are:
*Trend
analysis
*Qualitative factors
Trend analysis
This
is comparing a performance measure over a period of time. Performance
factors can be compared over a period of five years in order to
assess how they are changing. Common trends for comparison would
be:
*Turnover
*Cost of sales
*Operating costs
*Earnings per share
*Net assets
A
word of caution
When carrying out trend analysis do take note of the following two
factors, which would distort performance.
* Inflation
*Currency depreciation
Inflation
All of us know that the domestic purchasing power of the rupee is
constantly falling. This is due to what is known as inflation. The
purchasing power of Rs 100 in 2004 April is definitely less than
that of Rs 100 in 2000 April.
When comparing numbers over a period of time it is good if inflation
can be removed in order to consider whether performance is actually
improving. The government publishes retail price indices and they
can be used for the purpose of removing inflation.
Currency
depreciation
The Sri Lankan rupee constantly depreciates against other major
currencies. In 1994 one US $ was 50 rupees. Today one US $ is approximately
100 rupees.
If a Sri Lankan company posted earnings of Rs. 1 billion in 1994
it would have been US $20 million. Even if earnings had doubled
to Rs. 2 billion by 2004 in US $ terms it would still be $ 20m due
to the fall in the value of the rupee against the dollar.
Investors
who analyse financial statements should note this to assess how
competitive their company's position is in the international arena.
In fact some Sri Lankan companies do prepare their accounts in US
dollars.
Qualitative
factors
The above mentioned trend analysis as well as ratio analysis discussed
previously are based on numbers. If I were to analyse the performance
of a company I would tend to base it on several other non-financial
factors, which I would call qualitative. The main questions for
which I would seek answers are
*Who are the directors?
*Who
are the shareholders and what is their holding?
*Has any individual or a group got more than 50% holding directly
or indirectly on the company?
*Who are the members of the management team and what is their track
record?
*Does
the company pursue innovations?
*What future strategies does the management have?
*How strong are the systems and controls in the company?
*Have they delivered wealth for shareholders in the past? Answers
to the questions above will have to be gathered informally from
a number of sources which include media, Internet, current share
holders, employees and even the grape vine.
Message
for the small investor
Don't go only by the numbers. Do search for other reliable qualitative
information. Some times numbers may be like a mirage in the desert
and what you see may not be what you get!
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