Triaging My Way To Financial Success: Taking Stock in IGM, Part II:

The Numbers – Collecting Quantitative Data

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After completing Part I you now have in hand a situational analysis (SA) and a much better understanding of IGM and confident that you’re started on the right track with how to conduct your qualitative research. Since we’ve dealt with the majority of the qualitative factors the next segment of our analysis will be quantitative and deal with the numbers of the company. The first thing I like to do after completing a SA is read the most up to date annual report I can find on a company.

Now before new investors start running away out of fear for financial statements an annual report is important to read because it includes much more than balance sheets, income and cashflow statements. The information presented in the annual report is important if you’re going to invest in individual equities and you have to get comfortable researching all elements of a business. An annual report is a great starting point to develop these skills before you move onto complicated financial statement analyses.

For a Canadian corporation SEDAR is a fantastic resource to use and easy to navigate within. Once you arrive at the main page click on the language you prefer (English or French).

Proceed to Company Profiles found along the top of the page.

Next you’ll see a box titled Public Companies with letters listed from A to Z. Click on I (for IGM) and you’ll be taken to a list of every public company registered in Canada with I as their first letter.

You can now scroll down the page until you find IGM Financial Inc and click on it.

Here is where you will find all the corporate information including mailing address of the head office, auditor, principal regulator, financial year-end date, etc. Locate and click on View This Public Company’s Documents and a number of public documents from recent years will appear including reports on voting results, news releases, notice of annual meetings and various forms.

Scroll down until you locate IGM’s Annual report - English dated Mar 20 2008. Take notice that on the previous page year end for the company is December 31st. It can take a company a few months to prepare statements for its annual report to shareholders and is often released yearly around the same time. The annual report we’re going to be looking at is for IGM’s fiscal 2007 year. Click on the link.

A code verification and Terms of Use screen will pop up that you’re free to read if you want. Enter the code verification in the box at the bottom (make sure it’s case-sensitive) and click Accept. The document will begin downloading in PDF form and if you don’t have Adobe Acrobat Reader on your computer I would encourage you to download it.

Now that you have the document in view, save it by clicking on Save a Copy at the top left hand corner. You don’t need to save every PDF file on a company (SEDAR archives a few years worth of data) but if you’re going to read the entire document at your leisure it might be easier to save it for viewing at another time.

Normally I read the entire report front to back twice and place notes of interest right into my SA to update my research. For a beginner I would concentrate on the reading the Report to Shareholders (page 3) first to get a sense of the tone management is expressing to shareholders about the past twelve months of operations. After reading a number of IGM’s reports I’ve come to expect that management will discuss in some detail the industry, operating highlights and what they anticipate moving forward in their operations. Over time you’ll learn to trust the management of certain companies, but as a beginner you have to put the information you read into the proper context and remain unbiased.

After the Report to Shareholders I next read the summaries on the three main units of the company: Investors Group, Mackenzie Investments & Investment Planning Counsel. Here you’ll find good descriptions of each operating unit of the company and be able to update your SA accordingly to what you find of interest or importance.

After these three sections you’ll find the Financial Section that many new investors cringe at. Before you dive in the numbers take your time and read the Management’s Discussion and Analysis section for all of IGM and the three operating units. It’s important to get a sense of what’s happening in the entire company before you dive into an accounting book on security analysis and start crunching numbers in a dark corner with endless pots of coffee.

I want to give an important piece of advice to new investors. Number crunching is similar to the advice I share with nursing students who are eager to start poking patients for IV’s. I can teach a monkey to take blood, but there are more important aspects in the assessment of a patient than just poking someone with a needle. Financial analysis is the exact same thing. Over time each investor learns how to calculate ratios, crunch numbers and get a sense of the numerical health of a company; but there are more important lessons to learn in your assessment of a company than just numbers alone. Far too often new investors fear the numerical analysis of a company and completely disregard the importance of putting those numbers into context with how the rest of the business is doing. Take your time, go through the report and when you’re just about ready to give up, throw the keyboard across the room and admit defeat...meet me at page 81.

We’re going to assume for a moment that there’s nothing of concern in the most current financial statements and that the company is being truthful in it’s reporting of revenues, expenses and income. Obviously you wouldn’t assume anything before you invest in a stock (dangerous) and no investor should simply take for granted the information provided in any statements provided by a company. Learning to interpret financial statements can be difficult, but for the sake of time and everyone’s sanity I’m not going to teach a financial accounting class at this time. The Big Picture is more important.

Many companies provide a review of anywhere from five to ten years of their operations in order to give investors a decent sense of where the company has been and where it’s going. These are always important sections of an annual report because they can be interpreted like rings on a tree. You can see what happened to the company during past market environments and get a better sense for what to anticipate and expect from the company in the future.

The specific quantitative data I generally focus on for Dividend Growth stocks include:

ROE
Book Value Growth
Price-to-Book
Dividends (growth, payout & yield)
Free Cashflow
Price-to-Earnings (trailing & forward)
Revenue/Expense growth
Liquidity Ratios
Debt to equity
Basic EPS & Diluted EPS

I encourage readers to take the time to read over the annual report more than once and in the next section I’ll explain the significance of these numbers and the reasons of why I place such importance on them.