It's late on Friday evening. So today I just want to send you a short sharp read before you head off for the weekend. This is a simple piece of advice that I picked up a long while ago - a superb shortcut to finding a good investment.
Basically it's a quick way to judge the health of a company by looking at the company reports. Because there is only one page in a report that you really need to turn to. And it's hidden right at the back - the 5-year summary.
It's the first place I look when I'm assessing a business. Knowing about it can save you a massive amount of time and hassle. Here's why...
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The one thing you really need to know
Accounts are pretty useless in isolation. If I told you that Sainsbury's operating margins were 3.36% last year - would it tell you much? No.
It's much more important to identify trends and see how a business is progressing. Even if you're familiar with the firm, this one table can be a great reminder of what's going on with the business.
We want to see if margins are getting better, or worse. We want to see if management are consistently growing turnover and earnings. And we also want to see if our dividends are building up nicely.
And the best place to find all of this information is in thefive-year summary - and these days most companies include it in their full year accounts. Here's an example:
Sainsburyfive-year summary
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| Row 0 - Cell 0 | 2010 | 2009 | 2008 | 2007 | 2006 |
| Revenue | 21,421 | 20,383 | 19,287 | 18,518 | 17,317 |
| Underlying operating profit | Row 2 - Cell 1 | Row 2 - Cell 2 | Row 2 - Cell 3 | Row 2 - Cell 4 | Row 2 - Cell 5 |
| Retailing | 671 | 616 | 535 | 429 | 352 |
| Sainsbury's Bank | - | - | - | 2 | -10 |
| Row 5 - Cell 0 | 671 | 616 | 535 | 431 | 342 |
| Underlying net finance costs | -79 | -113 | -99 | -92 | -98 |
| Share of post-tax profit/(loss) from joint ventures | 18 | 16 | -2 | - | - |
| Underlying profit before tax | 610 | 519 | 434 | 339 | 244 |
| Increase on previous year (%) | 17.5 | 19.6 | 28 | 38.9 | 2.5 |
| Underlying operating profit margin excluding Sainsbury's bank (%) | 3.36 | 3.26 | 3 | 2.54 | 2.24 |
If you're not familiar with accounts, this summary is usually pretty easy to get your head around. All the key indicators are included in one easy-to-read table.
From the very start of your investigations, this summary can highlight areas of strength and areas for concern.
In this case, I love the fact that the business has increased the dividend every year for the last five years. It's gone up from 8p to 14.2p (highlighted in blue in the table below). But the proportionate increase in the earnings has fallen from 36.8% in 2007 to 12.7% today (highlighted in green).
| Row 0 - Cell 0 | 2010 | 2009 | 2008 | 2007 | 2006 |
| Underlying basic (pence) | 23.9 | 21.2 | 17.4 | 13 | 9.5 |
| Increase on previous year (%) | 12.7 | 21.8 | 33.8 | 36.8 | 21.8 |
| Proposed dividend per share (pence) | 14.2 | 13.2 | 12 | 9.75 | 8 |
From this one simple table you've got a great idea of how the business is performing.
This summary page can save you an awful lot of time by giving you the overview of key information. If you take a look and you don't like what you see, then there's no need to read the whole report.
Chuck it in the bin (or close the window down on your PC)
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A shortcut to spotting a good investment
Companies put in different data as they see fit. Sometimes you may be lucky enough to get the balance sheet summary included, or maybe the NAV figure. That's really useful for a real estate company for instance.
It just depends on what the key indicators are for that business. Though I haven't included it in the table above, Sainsbury also includes stuff like sales per square foot of retail space. Obviously, that wouldn't mean a lot to an airline company. It all just depends.
The key thing is to identify trends in the figures that you consider important. Always look at profit margins and always look at turnover - and net profit. If these three paint a poor picture, you probably shouldn't go any further. After that, it's up to you to assess the indicators that matter to you.
If you're serious about a company, you can copy the data into a spreadsheet and play around with the data. You can plot charts and do all sorts of other manipulations to help you get your head around the trends and make forecasts.
Never get caught up in all the guff information at the beginning of a set of accounts - it's mostly spin. Go straight to the figures that matter most and you'll not only save a load of time, but you'll have a better idea of the overall standing of the business.
Just to note: you don't have to be a shareholder to get hold of company accounts. I know this has flummoxed readers before. You can download them from the company website, or the stock exchange website. The download page is usually tucked away under investor relations'.
Always start with the five-year summary. It's a rule that's served me well as an investor over the years. I hope it will do the same for you.
This article was first published in the free investment email The Right side. Sign up to TheRightSide here.
Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd.
MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798.
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
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