Latest Financial Planning News
Hot Issues
Business confidence hits 5-month high: NAB
New Year resolutions, New Year strategies
How will downsizer contributions work for SMSFs?
Where Australia is at. Our leading indicators.
‘Read the tea leaves,’ brace for cryptocurrency regulation, advisers told
Power of retiree super dollars
Beyond share prices
Financial advice is the leading trigger to review insurance inside Super
Opinion – 2018 to be the year of the machine
Rising risks to the status quo
UPDATE: Australia's vital statistics
As share prices rise, the risk-return trade-off gets tricky
Technical expert flags top 3 traps with CGT relief
Become a better investor through your holiday reading
Australia's vital statistics
Made in Albania? How globalisation is creating challenges for Chinese policymakers
Our Advent calendar for 2017
For the young it a question of engagement
Address Under-insurance at Personal Finance Level - Global study
Realism vs reality - working part-time as retirees
SMSFs warned on ‘ticking time bomb’ with outdated deeds
Statutory wills are underutilised in estate planning
Articles archive
Quarter 4 October - December 2017
Quarter 3 July - September 2017
Quarter 2 April - June 2017
Quarter 1 January - March 2017
Quarter 4 October - December 2016
Quarter 3 July - September 2016
Quarter 2 April - June 2016
Quarter 1 January - March 2016
Quarter 4 October - December 2015
Quarter 3 July - September 2015
Quarter 2 April - June 2015
Quarter 1 January - March 2015
Quarter 4 October - December 2014
Quarter 3 July - September 2014
Quarter 2 April - June 2014
Quarter 1 January - March 2014
Quarter 4 October - December 2013
Quarter 3 July - September 2013
Quarter 2 April - June 2013
Quarter 1 January - March 2013
Quarter 4 October - December 2012
Quarter 3 July - September 2012
Quarter 2 April - June 2012
Quarter 1 January - March 2012
Quarter 4 October - December 2011
Quarter 3 July - September 2011
Quarter 2 April - June 2011
Quarter 1 January - March 2011
Quarter 4 October - December 2010
Quarter 3 July - September 2010
Quarter 2 April - June 2010
Quarter 1 January - March 2010
Quarter 4 October - December 2009
Quarter 3 July - September 2009
Quarter 2 April - June 2009
Quarter 1 January - March 2009
Quarter 4 October - December 2008
Quarter 3 July - September 2008
Quarter 2 April - June 2008
Quarter 1 January - March 2008
Quarter 4 October - December 2007
Quarter 3 July - September 2007
Quarter 2 April - June 2007
Quarter 1 January - March 2007
Quarter 4 October - December 2006
Quarter 3 July - September 2006
Quarter 2 April - June 2006
Quarter 1 January - March 2006
Quarter 4 October - December 2005
Quarter 2 of 2008
Top 5 financials to know about a company (Part 1)
Out in the cold
New face for retirement and tax planning
Investment Markets Data - To 31st May 2008.
Bad Habits
Much Overlooked.
Have we witnessed the market bottom?
How's your financial literacy?
Investment Markets Data - To 30th April 2008.
Budget 2008 - 2009
'White-anted by debt'
Liposuction for your personal debts
Have we witnessed the market bottom?
Pensions & Share Market
Investment Markets Data - To 31st March 2008.
Top 5 financials to know about a company (Part 1)
Story by Nick Renton AM
June 16th 2008

A cynic was on the right track when he claimed, "The sumptuousness of a company's annual report is in inverse proportion to its profitability that year."

Investors contemplating the purchase of shares in a specific listed company can get hold of its latest annual report - either in hard copy by requesting a copy from the company or its share registry, or these days simply by downloading it from the Internet. The latter is faster and this approach also facilitates searching.

Such reports nowadays are usually quite bulky documents, typically containing 100 to 150 or so pages. The size comes about because of the requirements under the Corporations Act and the Listing Rules of the Australian Securities Exchange (ASX), and the need to comply with Australian Accounting Standards. Most "mum and dad" investors would probably not wish to devote the time needed for reading such weighty documents from cover to cover, so what should they concentrate on?

A good start might be to look at dividends, net tangible assets, earnings, the gearing ratio and the company's growth rate. Investors should focus on "per share" figures, rather than the millions of dollars totals which often make the headlines.

Each report will include a balance sheet, an income statement and a statement of changes in equity, amongst a lot of other information. Together these make up the financial statements (often just referred to as the company's "financials").

The annual reports will also contain a lot of additional information, including statements by the directors certifying the accuracy of the accounts and often also by the chief executive officer commenting on the results and the company's prospects. Also set out are detailed notes to the accounts and a report by the independent external auditors.

Dividends and net tangible assets figures are discussed in this Part 1. Earnings, gearing ratios and growth rates will be discussed in Part 2.


Dividends are important for investors in two separate ways - because of the clues they give as to the company's future prospects and because they tell the shareholders what cash they are going to get from their investment.

The latter aspect is particularly important for some categories of investor, such as self-funded retirees.

Only some of the total earnings available for a company's ordinary shares in respect of any one year are usually distributed to its shareholders in the form of dividends. The rest are "ploughed back", in other words retained in the business.

Dividing the total earnings (net of any preference dividends) by the total ordinary dividend payout for the year (interim plus final distributions) gives the "dividend cover" - a yardstick which gives a rough indication as to how secure the continuation of the rate of dividend might be.

The "dividend yield" is obtained by dividing the dividend figure (in cents per share) by the market price of the share (also expressed in cents).

However, dividing a historical dividend figure by a current market price can often be misleading, as the latter reflects investors' views of the future rather than the past.

Apart from that, it should be noted that the apparent annual return from ordinary shares as measured by the dividend yield is not at all comparable with the return from fixed interest investments, as the true return from shares includes the capital growth element.

Dividend declarations need to indicate the "franking ratio", in other words the proportion of the distribution which is franked and therefore associated with an imputation credit. For fully franked dividends the franking ratio is 100 per cent.

To make yields from franked dividends properly comparable with returns from alternative investments they should be "grossed-up" by multiplying by 1.429, in order to reflect the current 30 per cent company tax rate.

Net Tangible Assets

The "net tangible asset backing per ordinary share" figure, often abbreviated "NTA", is one possible measure of the worth of a share, although its usefulness is subject to some reservations. It can be compared to the market value of the share.

In an ongoing company the various measures related to income tend to be more relevant, as the asset backing of a share is not normally available to shareholders unless the company is placed in liquidation or makes a capital return, or unless a takeover offer reflecting this backing is made and accepted.

In any case, a company's assets are usually much more valuable on a "going concern" basis.

On the other hand, in the case of a company in financial difficulties and facing bankruptcy, the book values used for the assets may turn out to have been too high and not realisable under the fire sale conditions that are then likely to prevail.

Book values can also be too low rather than too high, particularly if assets have not been revalued recently in order to allow for inflation and the costs of replacement.

If there is only one class of ordinary shares then the "per share" figure is obtained by dividing the company's adjusted total net assets (gross assets less intangibles) by the total number of ordinary shares on issue.

A low NTA in comparison to the issue price of shares in a float is a prima facie indication that the promoters have been too greedy, at the expense of subscribers to the issue. This greatly increases the risk that these investors will be showing a loss once the new shares are listed.


By - for more articles like this click here. is Australia's pre-eminent news and investing site for investors and traders, covering shares, superannuation, property, financial planning strategies and more.