Is “huge” profit a necessary condition?
Typically, during the financial reporting season, we often come across investment group recommendations along the lines of: “Company X is preparing to announce its business results with a very large profit,” and “We recommend investors to join in so as not to miss out on the Tet train.”
With such positive information, many small investors like myself are interested, especially in the current economic context of ongoing difficulties, bankruptcies, and losses in many businesses. In order not to miss the “Uptrend train” as the broker analyzed, I hastily decided to invest a significant amount of money in a recommended stock with expectations of having a prosperous Tet holiday. After purchasing, the stock price increased quite well, hitting its peak and making me extremely thrilled.
However, after Company X officially announced its business results, which matched the profit figure given by the broker earlier, my stocks not only did not increase but also decreased significantly. At this point, my investment portfolio recorded a loss rate of more than 12%.
As a small investor with limited experience in the market and lack of financial knowledge, I began to worry and didn’t know how to proceed. Afterward, I managed to contact a friend who is an experienced investor in the market for advice.
My friend said that although Company X recorded a “huge” profit in the year, when looking closely at the financial report, the actual source of this income comes from debt sales and unexpected financial revenue through various “tricks and manipulations.” This profit nature does not come from the core operations of the company, as the cash flow from business activities continues to show a large negative amount. Furthermore, my friend advised me to look at the audited financial reports for a more objective view of the company.
Comprehensive view of financial statements
Listening to my friend’s analysis, I truly regretted my wrong decision. I gradually understood that for investing in a stock, a “huge” profit alone is not enough.
To have a comprehensive view of a company’s financial situation, instead of solely focusing on the profit figure in the business performance report, we need to pay attention to the main items on the balance sheet such as inventory, accounts receivable or payable, owner’s equity, internal transactions… Typically, each type of business and industry has different proportions of items on the balance sheet. If we observe any abnormal increase or decrease in a certain item, small investors should be cautious and investigate the underlying reasons.
Not only looking at the balance sheet, but also maintaining stable business operations requires cash flow, which is the key to every business. Therefore, we must pay attention to the cash flow statement. In the stock market, many companies announce huge profits, but their annual operating cash flow shows a significant negative amount. This raises questions regarding the stability as well as the ability to maintain business operations of these companies. Does this company really have money? Is the profit virtual and being transferred from one hand to another?
In addition, when analyzing profit, we need to consider the sources of income. If it primarily comes from financial revenue or other profit items, we need to delve deeper and study to gain an objective view. Such income does not come from core business activities and usually does not generate sustainable income for the company in the long run. On the other hand, many profits come from evaluating assets, so they do not create cash flow for the company.
Moreover, reading the management report is an important step that helps small investors search for information and analyze sudden increases or decreases in items, and thus make objective assessments of the company as well as its stocks.
After listening to the analysis from my friend, I now realize that there are many factors influencing the profit and business performance of a company. As a “rookie” and a “genuine F0” in the stock market, I find stock investment to be quite challenging. There is too much “noise” from information overload, coupled with a lack of financial knowledge, which has taught me an unforgettable lesson. It is time to equip myself with solid knowledge before participating in the market.
