Better Business Journalism

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• Better Business Journalism
• Seminar Workshop
• 17-18 June 2007
• Sarajevo

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Vocabulary/concept blitz 1

• Amortisation Credit ratings Future contracts
• Antitrust Currency board Futures
• Appreciation Demand side GDP vs GNP
• Arbitrage Deposit insurance Gilts
• Asymmetric shock Depreciation Hedge funds
• Balance of payments Derivatives Hedging
• Basis points Diversification Horizontal
  integration
• Bond yields Dividends IMF
• Bretton Woods Dumping "In the Black"
• Bubble Economies of scale "In the Red"
• Capital controls Equities Inflation
  targeting
• Capital gains FDI Institutional investors
• Commodities Fiscal policy Intellectual
  property
• Cost-benefit analysis Flotation Intervention
• "Creative destruction" Free lunch Investment
  funds
• Credit Full employment

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Vocabulary/concept blitz 2

• Labour market flexibility Political
  risk Substitution effect
• Large-cap, small-cap, etc Predatory Pricing Sunk
  costs
• Leading indicators Price/Earnings
  Ratio Supply-side reforms
• Leverage buy-out Purchasing Power Parity Time
  value of money
• MA Privatisation Transaction cost
• Market capitalisation Quota Unemployment trap
• Market saturation Real Interest rate Value
  added
• Mixed economy Real unemployment Vertical
  integration
• Misery index "Redlining Windfall profit
• Monetary policy Repo Withholding tax
• Money markets Rescheduling World Bank
• Moral hazard Securities Yield curves
• Net present value Securitisation Yield gap
• Opportunity cost Shorting Zero-sum game
• Outsourcing Structural adjustment Point of
  diminishing
• Overheating Structural unemployment
  returns

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? TOOLS ?for making more senseof financial
statements

• Resources
• Balance sheets
• Income statements
• Cash flow statements

• Analytical approaches
• Financial position
• Profits
• Business performance
• Market value

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Analysing financial position
Current ratio

• Current assets
• Current liabilities
• Very simply tells us how many dollars a company
  has, per 1 dollar owed.
• If below 1, then theres a liquidity crunch.
• If too high, assets may not be being used well.
• Norms and ideal values vary by industry. For US
  norms, for example, see http//www.bizstats.com/cu
  rrentratios.htm
• (Textile manufctr 2 Oil products 1.2 Oil
  extraction 2.3 Metals 1.7 General retail 1.4
  Banking 0.9)

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Analysing financial position
Acid test ratio

• Cash Accounts receivable Short-term
  investments
• Current
  liabilities
• What we might call a pure test of liquidity, it
  answers one question only can this company pay
  off its debts today if creditors suddenly demand
  repayment?
• The acid test ratio excludes inventory, since
  inventory is not perfectly liquid.
• If acid test is much lower than current ratio,
  then the current ratio is highly dependent upon
  inventory, and this may be important.
• If lt1, look at industry norms versus company
  specifics, etc.

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Analysing financial position
Debt-to-equity ratio

• Total liabilities
• Shareholders equity
• If gt1, then assets are primarily financed with
  debt.
• If very high, then the company may be overly
  indebted however, if very low, then the company
  may be playing too conservatively.
• Look for trends, from quarter to quarter or year
  to year, for indication of need for cash
  (issuance of new shares), or changes in debt
  portfolio volume, seeking explanations.

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Analysing financial position
Debt-asset ratio

• Total liabilities
• Total assets
• Similar to the debt-equity ratio
• If gt1, majority of assets financed through debt.
• If lt1, majority of assets financed through
  equity.
• A high ratio indicates a heavily debt leveraged
  firm, in which case the company may be
  susceptible to rate shock.
• Again, trends over time may expose interesting
  issues.

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Analysing financial position Average
interest rate

• (Interest expense Accounts
  payable)
• 
  Liabilities
• Roughly estimates (does not give exact) interest
  rate at which a company usually borrows money. By
  extension, may indicate creditors view of its
  credit-worthiness or, for an average co, may
  merely show common practices.
• Note that pre-tax and after-tax results may
  differ.
• Remember this is not just bank credit but also
  bonds.
• No long-term debt, no interest expense.
• Compare changing rates over time to market rate
  changes.

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Analysing profits Operating Profit

• Operating Income
• Net Sales
• Simple way to measure how much money a company is
  making from is primary business operations. Use
  this to compare changes in earnings over time, by
  comparing results from quarter to quarter or year
  to year. Also use to compare earnings efficiency
  of competitors.
• Operating income Net sales (Cost of goods
  sold general and administration)
• The closer to 1, the better!

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Analysing profits Gross Profit
Margin

• Revenue - Cost of goods sold
• Revenue
• Simple measure held to be very important by many
  companies shows how much a company marks up
  its products for sale. A typical company might
  have a 50 mark-up, in which case the margin is
  33. But as always consider industry norms,
  nature of market, etc.
• Stable gross profit margins are usual, so if over
  time they change, ask why you may uncover
  important trends.
• Results may skew if company has wide range of
  products.

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Analysing profits Return on assets (ROA)

• Net Income (Profit minus expenses)
• Average assets for the period
• Tells us how much profit the company generated
  per dollar during a given period.
• A company with ROA lt5 is very asset-heavy,
  whereas a company with ROA gt20 is very
  asset-light.
• Compare to other companies in the industry, or to
  the same company in a different period.
• ROA should be above companys average interest
  rate.
• Ignores intangible assets (like intelligence).

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Analysing profits Return on equity (ROE)

• Net Income (Profit minus expenses)
• Average shareholder equity for the period
• Some analysts say this ratio counters companies
  false claims of record profits. Real successes
  in profit growth need to be understood in
  contextual proportion, and the context of
  shareholder equity is useful here. A high ROE
  indicates wise reinvestment of past profits.
• Norms for successful companies in the USA through
  most of the 20th Century were ROEs of 10-15.
  During the 1990s, around 20. ROEs change with
  markets.

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Analysing performance Common size
analysis

• Item of your choice Item
  of your choice
• 
  
  (OR)
• Total assets
  Total revenue
• (balance sheet)
  (income statement)
• For comparison over time or between companies,
  measure the item of your choice as a proportion
  of assets or as a proportion of revenue.
• Use this analysis to draw of the balance sheet or
  income statement in s then compare size by
  side with previous reports or competitors
  reports. An excellent way to see the shape of a
  business.

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Analysing performance Inventory
turnover

• Cost of goods sold
• Average inventory during chosen period
• Generally speaking, the higher the better.
• Compare a companys performance over time.
• Is sales growth being outpaced by inventory
  growth (maybe a sign of trouble)? Or vice versa?
• Consider what the figures may indicate about
  supply and demand the real nuts and bolts of
  economy, after all.

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Analysing performance Collection
ratio

• Accounts Receivable
• (Revenue / 365)
• A very practical measure of the effectiveness of
  a companys business administration. It shows
  average time a company takes to collect payment
  on sales.
• Mainly useful in markets in which credit is a
  very common form of payment, not cash (since cash
  is paid immediately) since accounts
  receivable is money owed, but revenue includes
  all money received.
• High score means slow to collect, so lower is
  better.

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Analysing performance Asset
turnover

• Total revenue
• Average total assets in chosen period
• Measures a companys efficiency in using its
  assets.
• Higher, obviously, is better.
• However, a high asset turnover is often couple
  with a low profit margin, and vice versa (since
  different companies seek profit differently).
• Used for comparing similar companies or a single
  companys performance over time

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Analysing performance Cash flow to
assets

• Cash from operations
• Total assets
• Cash flow is important. Consider how some Balkan
  companies have attempted to operate, in hard
  times, without sufficient cash on hand. Life gets
  hard. This ratio helps us to measure how much
  cash a company has on hand, against the companys
  overall size.
• Compare this ratio, year to year, looking for
  trends.
• If lt10, there may be cause for concern.

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Analysing market value Book value per
share

• Shareholders equity preferred stock
• Average outstanding shares
• Stocks trade below book value only under
  extremely adverse conditions, so usually the
  question is how much higher? Compare BV per
  share to the current stock market price. Also,
  analyse the difference over time.
• Changes in book value per share indicate change
  in investment communitys expectations.
• If priced below BV, a stock is likely undervalued
  (rare).

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Analysing market value Earnings per
share (EPS)

• Net income Dividends on preferred stock
• Average outstanding shares
• Primarily used to analyse a companys performance
  over time, with an eye to shareholders interests
  earnings growth typically yields dividends in
  addition to rising market value of stock.
• Some analysts try to forecast future EPS by
  looking at EPS over the past four quarters.
• Issuance of new shares complicates EPS
  significantly and can make comparisons less
  useful, so beware.

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Analysing market value Price-to-earnings
ratio (P/E)

• Market value per share
• Earnings per share (EPS)
• Get market value from todays market get
  earnings from companys income statement. (In the
  US market, average P/E ratio is about 20.)
• The P/E ratio shows how much investors are
  willing to pay for 1 of future earnings.
  Typically, a high ratio indicates that investors
  anticipate stronger earnings in the future, and a
  low one shows investors are betting earnings will
  fall. In other words, the P/E ratio is used as a
  crystal ball (although in business and economics
  as in all life there are no foolproof forecasting
  mechanisms!)
• Companies that are losing money do not have P/E
  ratios.

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Analysing market value Dividend
payout ratio

• Yearly dividend per share
• Earnings per share (EPS)
• A simple way to find out how generous a company
  is toward its investors. This ratio shows how the
  proportion of earnings used to pay dividends.
• Look for consistency over time does the
  companys board run a solid dividend policy?
• Compare companies investors like dividends, and
  a stingy company may be punished while a generous
  one is rewarded!
• However, some companies reinvest wisely rather
  than paying dividends, and this yields capital
  gains instead.

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Essential story elements

• Who, what, where, why, how
• Action verbs
• Quotation
• Setting
• Nut graph within the first 5-6 paragraphs
• Basic background
• Multiple sources
• Strong focus throughout
• Helpful (not stifling) use of numbers
• Kicker

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Writing winning leads

• Concise, gripping first paragraph (ideally 1
  sentence 10-15 words)
• Straight news ?
• Scene
• Character driven
• but graphs