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Description of The Investor's Guide to Understanding Accounts

Many investors ignore company accounts because they think they are too difficult. But, as the great investor Peter Lynch said "Investing without looking at the numbers is like playing bridge without looking at the cards".

The mission of this book is to explain to ordinary investors, with no accounting knowledge, what to look for in a set of accounts and how to interpret what you find - so that you have an accurate 'health check' on a company in ten simple steps.

Robert Leach considers the entire subject from an investor's point of view, by asking - and then answering - the questions which matter most. He also looks at the techniques which companies sometimes use to flatter their accounts, and shows how accounts for companies in different sectors have to be looked at differently.

The 10 Crunch questions:

1. Is the company growing?
2. Are costs under control?
3. Does it make a profit?
4. How much cash does it have?
5. Is its market value supported by assets?
6. Is it using debt wisely?
7. Are there any hidden nasties?
8. Is management good enough?
9. Can I expect a reliable income?
10. Are there any threats to my interests?

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Title Information

ISBN:

9781897597279

Pages:

246 pages

Format:

Paperback

Product Code:

15717

Publisher:

Harriman House

Published:

19/07/2004

Edition:

1st Edition

Financial Guru Reviews

This may sound like a really boring one, but Leach has turned what could be a very unexciting subject into an interesting one. Ever wondered how to look at a set of accounts and know whether it's all good or there is trouble ahead? Are they cooking the books? There's also an excellent ten-point summary which will point you in the right direction.
Robbie Burns

Reviews

• "Investing without looking at the numbers is like playing bridge without looking at the cards." Peter Lynch WHAT’S IT ABOUT? Trawling through company accounts is not the way many of us like to spend our spare time. But as Peter Lynch would agree, if you want to invest in a company, you need to know exactly what you are getting yourself into. If you want the pay-off you have to put in a bit of work. This new book from Robert Leach makes this task a lot easier. He shows investors, with little or no accounting knowledge, what to look for in a company's set of accounts, and how to interpret the results; only then should the decision to invest be made. Reading a set of company accounts is made simple by setting out the key things to look for, in simple terms, so they can be ‘ticked off’, like a check-list. As well as general advice on choosing a company there is a great deal of specific information on the analysis of the set of accounts. Leach approaches company accounts by asking ten 'crunch' questions that any investor should ask about a company before making an investment. These include: “is the company growing?”; “Does it make a profit?”; “How much cash does it have?”; “Are there any threats to my interests?”; and “are there any hidden nasties?”. He then answers them, and here is where the crucial information is found. Each question is answered methodically by using and explaining key terms, ratios and formulae, all of which are found in financial reports. TEN KEY QUESTIONS After the ten key questions have been dealt with, the book tackles specific areas of investment, such as AIM companies, construction and technology companies, and how the ‘crunch’ questions can be applied to different types of business. Here Leach highlights the key points relevant to each sector, such as the impact of international politics on the airline sector, and the popularity of certain football clubs pushing share prices far above their commercial value, a worrying fact that isn’t helped by the ever-rising pay cheques given to the players! We also find two useful tables towards the end of the book: ten signs of a company in good health; and ten signs of a company in trouble. Each of these provides potential investors with a basic list of things to look for and understand, ensuring no investor is lured into a bad investment by the distraction of meaningless calculations and unrealistic claims. INDICATORS OF SUCCESS Leach suggests that there are certain indicators which show that a company is successful. These include: the financial highlights being within the first two pages of the report; equal prominence being given to both sales and finance; and it owing less than half the amount it is worth. A company that had all of these should be well on the way to success, taking its investors with it. However, there are some tell tale signs of a company which might not be all it’s trying to make you believe it is. He also implies that, despite all the apparently ‘positive’ statements a company might make, if the accounts in the report are difficult to find, follow or read, or there are more than three photographs of the chairman or chief executive in the reports, these are merely diversionary tactics and the company should be avoided at all costs. And a company to be treated with the most extreme caution is one where you find a flagpole or fountain at its head office! All the ratios that you will find mentioned in company accounts, and how they are calculated, are found in this book. With a glossary of accounting terms and definitions, and common abbreviations found in accounts and investment, everything you need in order to read a set of company accounts is found here in one book, leaving you to make the next step - investing in your chosen company.
  Pa Watkins
  Wm Robb Ltd

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About Robert Leach

Robert Leach FCCA FIPPM ACertCM is a certified accountant, private investor and author of over 30 books. His titles include How to Make Money on the Stock Exchange (Foulsham), Financial Times Guide to Your Company Pension and Allied Dunbar Guide to Financial Planning for the Over 50's. For two years he was a judge of the Stock Exchange Awards for best published accounts. He is the author of the looseleaf works Payroll Factbook and Tax Factbook published by Sweet & Maxwell. He also writes for newsletters, magazines, newspapers and anyone else who will pay him. www.robertleach.co.uk

Contents of The Investor's Guide to Understanding Accounts

I. WHY YOU CANNOT AFFORD TO IGNORE COMPANY ACCOUNTS

Introduction
Aim of this book


II. THE 10 TESTS THAT A SET OF ACCOUNTS MUST PASS

1. Is the company growing?

- Sources of sales
- Business focus
- The future sales outlook

2. Are costs under control?

- Comparison to sales
- Extraordinary and exceptional items
- Depreciation
- Working capital
- Tax
- Research & development

3. Does it make a profit?

- Profit margins
- Gross profit
- What is the return on capital employed?
- What is EBITDA?

4. How much cash does it have?

- Cash generation and consumption
- Paying suppliers
- Getting paid by customers

5. Is its market value supported by assets?

- Market value
- Enterprise value
- Fixed assets
- Current assets

6. Is it using debt wisely?

- The level and type of debt
- Paying off debt

7. Are there any hidden nasties?

- The level of liabilities
- Contingent liabilities
- Tax
- Pension liabilities

8. Is management good enough?

- The Combined Code
- Incumbents
- Strategy
- Directors' salaries
- Shareholdings
- Employment contracts

9. Can I expect a reliable income?

- Dividend policy
- The 'price' of dividend income

10. Are there any threats to my interests?

- Who owns the company?
- Other issues
- External threats to shareholders
- The ultimate threat


III. APPLYING THE 10 TESTS TO DIFFERENT TYPES OF BUSINESS

Aerospace, AIM companies, Airlines, Alcohol and breweries, Automobiles, Banks, Business Services, Chemicals, Construction, Construction materials, Engineering, Food manufacturing, Food retailing, Football clubs, Household goods, Insurance, Internet companies, Investment trusts, Leisure industry, Media, Mines, Oil industry, Pharmaceuticals, Property, Retailers, Shell companies, Technology companies, Telephone companies, Television companies, Tobacco companies, Utilities, Wholesalers & distributors


IV. THE RELIABILITY OF REPORTS AND ACCOUNTS

- The main financial statements
- Are accounts reliable?
- The Auditor's report
- Legitimate ways for companies to 'improve' their results
- Fraud


V. SUPPORTING INFORMATION FROM OUTSIDE THE ACCOUNTS

- Updating the information in accounts
- Independent research
- Directors' dealings

VI. SUMMARY
- 10 signs of a company in good health
- 10 signs of a company in trouble
- Key accounting ratios and measures

APPENDICES

1. Sources of company accounts
2. Software for investors
3. Glossary of accounting terms
4. Common abbreviations in accounts and investment
5. Companies mentioned in this book
6. Further reading on company accounts

INDEX