how to read financial statement

DividendMagic Taught Me How to Read Financial Statements and Buy Stocks

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If you’re into Malaysian stocks, you must have heard of Leigh from DividendMagic, the 28-year old financial blogger. Leigh’s investment of choice is dividend investing, and in his blog he freely (and anonymously) share the stocks he keeps (and sells) and how they perform over the years.

I told Leigh how stocks have always been intimidating for me, and asked if he could teach me how to read financial statements so I will know what information to look out for in that long-ass document. He said yes 🙂 With his permission, I’m sharing what I learned with you people too!

Some basic info before we start:

  • I can be considered a complete beginner in the stock market. I don’t follow the news at all. Thus this article is suitable for blur blur people like me too.
  • Other people may have different ways of reading financial statements. We’re not saying this is the right and only way – this is simply one beginner-friendly way.
  • This article is for people want to do fundamental analysis, not technical analysis. (Note: See the difference between the two in #1 at ‘I just want to invest; what does these investment terms even mean?‘ article)
  • Don’t ask us which stocks to buy in Malaysia. Like seriously just don’t. Both of us have the same principle – we share what we invest in, sure, but we never tell people what they should buy.

“Orait Suraya, just print out the latest annual report of the company you’re interested in,” said Leigh cheerily, “and we go through what BASIC info I personally look out for before I decide to buy the company’s stocks.”

Leigh and I have been friends for a couple of years now and until now it messes with my head how this tattooed fella is a legit certified financial planner. Registered with the Financial Planning Association of Malaysia all.

The company I’ve always been interested in is AirAsia Group Berhad. I went to their website, found ‘Investor Relations’, and downloaded the 2017 Annual Report. (Note: not linking back to AirAsia because I’m not promoting them. They’re just an example here).

how to read financial statement

AirAsia’s 2017 Annual Report is like 386 pages long. And the cover, woah. If I didn’t know any better, I would have thought they’re an MLM.

how to read financial statement

“It’s usually not like that…,” said Leigh, “usually annual reports are much shorter… 100 to 200 pages or so… and have old men on the cover or something boring like that.”

Ah ok. AirAsia is just damn extra then. They don’t reflect other public-listed companies. Got it.

How to read financial statement (for Malaysian companies, at least)

In this section, I’m going to cover all the sections in the financial report where Leigh pointed and said ‘that one important.”

I was worried it was going to take long. It didn’t. Excluding our chit-chat, it was like 10-15 mins looking at the report in total?

Here’s what we looked at, in order.

#1 – Key highlights page

how to read financial statement

“Just have a glance at the company statistics,” said Leigh, “AirAsia nicely turned this section into a visually-pretty infographic, but it’s not always like that.”

It’s important to note that some statistics are industry-specific. For example, load factor is super important for the airline industry. The higher it is, the better. I’m guessing this is why they say you should invest in industries you’re familiar with, so you intuitively know what metric and information to look out for.

#2 – 5-Year Financial Highlights

At first, this page intimidated me. I mean, look at the numbers packed in here!

how to read financial statement

So here’s the most important figures to look at and why.

how to read financial statement

Some notes:

  • Note the industry-specific statistics on this page. They are important too. In this case, for airline industry, increase in passengers carried and load factor are considered good
  • Restated’ (see under 2016) means last time maybe got material inaccuracy and this data is the correct version
  • Most times, you won’t get a company financial report that show everything is perfect one. As long as most are good (ie whatever that should increase, increased), then the company have potential. Case in point: AirAsia recorded -RM908 million negative cash flow in 2016, but it was due to its financing activities.

#3 -Look for these ‘statements’

Statement of profit and loss. I think in this particular case, it’s unique because AA just incorporated in August 2017 and that’s why it has a net loss of RM6.336 billion? I mean most other metric record increase in growth and revenue so that much loss doesn’t make sense..

how to read financial statement

Income statement – Just kinda have a look at their revenue, what they spend on, and how they calculate their ‘net profit’ total.

how to read financial statement

Statement of financial position – check ‘liquidity ratio’, ie do they have enough money to pay their debtors if all ask at the same time. Calculation: net current liabilities divided by assets.

how to read financial statement

In AirAsia’s case, it’s in the negative. That’s not good actually.

What to do after reading financial statement

If you liked what you read, buy the stocks. DividendMagic has a comprehensive guide here.

If you don’t like what you read, don’t buy it. Pick up another financial statement and do the above simple analysis all over again. Over time you’ll understand a bit more and a bit more until you expert.

I was curious about when to buy the stocks, so I asked Leigh if we should wait until the price is ‘right’. Leigh said:

  • If the fundamentals are good and it just so happen that the price is negatively affected due to temporary bad PR or other factors (CEO died or something), get it like NOW. Usually the price will increase again soon (but not always!)
  • If fundamentals are good and we’re not sure if the price is going up or down, then if you want it, just get it because the price really could go either way. If you wait too long, you may not act. The slower you act, the less you get hands-on learning, the actual process that makes you a better investor. Remember to always stay invested.

Other stocks-related questions

I asked Leigh what’s his usual process of picking stocks. He shrugged and simply said he buys stocks of companies that offer products / services that its customers generally cannot live without and use on a daily basis.. If you look at his portfolio, he has a combination of company stocks, from banking to food to property.

How many different types of stocks should one have, I asked. Maybe stocks from around 5 or 6 companies to start?, Leigh said. Diversify a bit. No max, but maybe cap at around 20 because the more you have, the harder it is to keep track and update your portfolio.

What’s your routine like with stocks, I asked? I log in my trading app occasionally to review prices, maybe once a week, Leigh said. And then really delving into companies if a particular share is doing extraordinarily well or badly. I also read The Edge to keep up with recent updates.

I shared with Leigh my plan to pick stocks – go with process of elimination. First, eliminate all the non-syariah companies. Then look through the remaining companies and see if I’m familiar with their industry enough. If yes, I’ll take a stab at reading their financial statements. If they look good, I’ll consider buying their stocks.

Can also, Leigh said.

(Side note: you think Bumi and Muslim people get many privileges in this country. But it also eliminated a lot of our investing options! I can never invest in Genting boooo)

Why choose stocks as investment, though?

I mean, you can just get mutual funds or unit trusts, right? They are comprised of individual stocks, usually across different industries for diversification

BUT mutual funds and unit trust charge fees. Some pretty low at 0.35% (ASB), some pretty high at 3% or more.

SO.. by picking your own stocks, you’re avoiding those fees. It can add up to quite a lot. Read up DividendMagic’s calculations in his That 1% Fee Impact – Mutual Funds vs Investing on your own article.

(note: stocks is not fee-free either. There are charges when buying/selling them).

But fund managers are smart people, I hear some of you protest. You’re paying them the fee for their ability to pick good stocks!

Here I have to let you know that actually fund managers don’t necessarily make the best stock picks, despite all the jargon they spew out. In fact, random stock picks may perform better (source: this Nasdaq article). I’ve also heard the story about the monkeys choosing stock picks by throwing darts and even those outperformed picks by fund managers?

So, like, I guess I feel intimidated over stocks over nothing? All the hard language they use, all those people in powersuits… doesn’t make a difference? Makes you wonder what else the financial industry makes you feel inferior about (even though it’s probably unintentional on their end). 

Personal opinion. Feel free to give your counter-arguments in the comments section 🙂

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  1. Aaah Suraya.

    This is a a brilliant guide to get the gist of it. Nice work on this article.
    I’ve always wondered how to make sense of the numbers to buy stocks.

    Thank you for this simple and easy to understand guide. 🙂

    1. Hi Hakim,

      Depending on the stock price one. Some expensive, some not so expensive. Check out DividendMagic’s guide – he proposed about RM8k’s worth in one shot to justify fees.

  2. Wahlaoeh. This simplified what I wanted to learn about stockbroking from rubik’s cube highest difficulty level to like how to use MS word tutorial. I know that the above is a bad analogy, but it really helps an average-financial joes like me to understand this “Godlike-level intimidating” subject. Thanks liao!

  3. Hi Suraya! Is it really true that you can’t invest in non syariah stocks? Due to your personal principle or legally not allowed to? Just curious.

    1. Hi Mr Vos,

      I guess I could if I want to. No syariah police is going to handcuff me or anything.

      But the guilt though. Dammit the years of brainwashing worked

  4. Hi there Suraya!
    I am not sure if you have touched on this topic before anywhere in your blogs. How do I know if a stock is shariah compliant or not? Interested to start investing. Thank you so much for teaching us how to read financial statements.

  5. Thank you for taking the time to break down and write the fundamentals of reading a financial statement! I’ve shared this awesome resource with my group!

  6. Hi Suraya,
    Nice going with starting with the equities market! I’d like to offer some thoughts:
    1) avoid companies with too low volume/liquidity. These could be companies that are a) family-owned, and they just hoard the stocks, b) which shares are dominated by institutional investors, or c) just not interesting in terms of their business hence do not garner enough interest from retail investors, not enough volatility, not much change in the stock price
    2) do not rush at all i buying stocks. Never. Remember Warren Buffet: first rule, do not lose money. If you lose one opportunity, there will always be another one. You might have to wait, but at least you’re not losing money
    3) the “Syariah-compliant” status should serve as a guide, but an investor should make his/her own call if companies like AirAsia Group or Mi Equipment are not “Syariah-compliant” on his/her own terms. Of course, for Genting Group as in your case, it’s quite clear!
    4) do not forget ETFs. They’re also traded on Bursa. Though currently, the liquidity is not there as you only depend on the market makers (specially appointed) to set the price

    I have some more as I have also just started since, like, 3 months ago! So my lessons are quite fresh. Perhaps another time I’ll add more!

    1. Hi Muhammad,

      Thanks so much for your comment, it’s very informative and helpful!

      All the best in your investing journey. You sound like you know what you’re doing 🙂

  7. This is great, printing it out. I’m still a noob, started investing beginning of this year (not too impressive yet). Leigh’s website was awesome in guiding beginners. He even responded to my questions, woot!

  8. Hi Suraya, what trading apps that you currently using yea? There are plenty of it and imma so confuse about it 😭

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