In the blink of an eye, it is earnings season once again as investors look to size up how companies are doing in the last half year.
Investors will be closely scrutinising not just the numbers, but also the management discussion and analysis (MD&A) section for signs of weaker demand or poor guidance.
The NASDAQ Composite Index has declined by 24.9% year to date and entered a bear market, while the unit prices of numerous REITs are hitting 52-week lows.
As you cautiously navigate the uncertain landscape, here are five financial metrics you should watch closely to understand the health of the underlying businesses.
There’s only so much a business can do to cut expenses for higher profits.
Hence, a company’s top-line growth is important as it gives insight as to whether its goods and services remain in demand.
Revenue may, of course, decline year on year over certain periods due to seasonal patterns or a dip in demand.
It’s insightful to understand the reasons for any revenue growth or decline so that you can put the situation in perspective.
Is the company going through a structural shift, or are there more competitors in the market?
Revenue growth during challenging periods may also point to a resilient business.
For instance, retailer Sheng Siong Group Ltd (SGX: OV8) reported a 6% year on year increase in revenue for its fiscal 2022’s first quarter (1Q2022).
The rise was contributed by the opening of one new store along with positive same-store sales growth of 4.7% year on year.
Profit margins are a good indicator of whether a business has pricing power and whether it can effectively control its costs.
With inflation at current levels, it’s a good idea to get a sense of a business’s net margins to assess if management can keep a lid on rising costs.
Businesses will normally experience some fluctuations in their gross and net margins, but a keen-eyed investor should look out for persistent declines that may signal long-term problems.
On the flip side, if the company reports steadily rising gross and net margins, it’s a sign that management is doing something right.
Singapore Post (SGX: S08) reported a higher operating margin of 6.7% for its fiscal 2022’s earnings compared with 5.6% a year ago as expenses rose less than revenue.
AEM Holdings (SGX: AWX), however, saw its net profit margin dip slightly to 15.6% from 16.6% for 1Q2022 even though its revenue more than tripled year on year.
Free cash flow (FCF)
Cash is the lifeblood of any business.
Investors should assess if a company can continue churning out healthy levels of free cash flow (FCF) to fund its operations and pay dividends.
Even during challenging times, solid businesses have demonstrated the ability to continue generating consistent FCF.
As an example, Singapore Exchange Limited (SGX: S68) reported healthy FCF for its fiscal 2022’s first half ended 31 December 2021.
Although net profit dipped 9% year on year, free cash flow rose by 5.4% year on year to S$240.4 million.
Dividends are closely related to the profitability and free cash flow generation capability of a business.
By observing the level of dividends paid, investors can gain a sense of how well a business is doing.
REITs such as Mapletree Industrial Trust (SGX: ME8U) have an unbroken record of paying out rising distribution per unit (DPU) since 2010.
Some companies may also pay out bumper dividends as a sign of a turnaround in business fortunes.
Keppel Corporation Limited (SGX: BN4) is one such example.
The conglomerate announced its highest profit in six years for 2021 and hiked its annual dividend to S$0.33 per share, more than triple the S$0.10 that was paid out a year ago.
With interest rates on the rise, it makes sense to periodically check a company’s debt level.
Unless the business has fixed the interest rates on its borrowings, it may have to deal with a significant jump in finance costs as banks reprice their loans.
Dormitory owner and operator Centurion Corporation Ltd (SGX: OU8) had around S$727.7 million of debt as of 31 December 2021, nearly 10 times the level of its cash and financial assets.
Its finance costs for the fiscal year 2021 took up nearly a quarter of its gross profit.
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Disclaimer: Royston Yang owns shares of Singapore Exchange Limited and Mapletree Industrial Trust.