Transcription
Hi friends, Simmit here from InformTrades.com. In this video, I want to talk about financial literacy for mining stocks. I'll be doing a number of videos on this subject. This is the first one. Let's get right in.
Four key points: Uh, one is the whole purpose of learning to read financial statements, that it helps us to identify which companies have the most profit potential, which ones are going to be the most, uh, the best, most promising businesses. Investing in those companies will yield us the best returns.
The balancing metrics that I want to focus on this video are market capitalization and equity. Uh, the cash on hand, current ratio, debt to asset ratio, price to book ratio. We'll, we'll define what those mean now, but, you know, there's a whole bunch of things we can focus on. I'll be focusing on those, uh, in this video.
Uh, one other point to consider is that value is relative to other companies and equity. So when you're, um, or how big the company is. So when you're looking at a company's debt situation, for instance, or its cash on hand, you want to think, you know, all right, how are other companies in the industry doing? You know, is this, does this company have a really unfavorable debt to asset ratio relative to other companies, as well as relative to its size? So, for instance, if a company is small but has, uh, a lot of debt, that can be a bigger problem than if a company is larger and has established revenue and profits and has a bit more debt.
Um, also, when you're looking at financial statements, you know, focus on reasons to say no. The best investors tend to be very selective. You know, there's only going to be a small number of companies that generate the huge returns. That's what we're looking for.
One of the first tools I use in doing research is Google Finance. It's a free tool. You basically just go to the web page, type in the company's name, you get a whole bunch of information right off the bat. The first thing I'll look at is the market capitalization, which is right here. Market cap is basically how much it costs to buy every share of that company. It sort of gives you an idea of what the company is worth, what the market has priced it at the current moment. Um, you know, the bigger companies, or the bigger that number is, the more that company is stable and sort of a less risky opportunity. Um, so it's an instant way of of assessing the risk profile. Personally, I like to see the 1 billion to 2 billion range in our current time in the mining sector as a really a sweet spot of opportunities where the company is, is somewhat stable, uh, but still has a lot of growth potential. When you get down the smaller side of companies that are worth 500 or 100 million or less, there you really see it's a higher risk, high reward game where the returns are potentially huge, but it's a bit more, uh, a bit riskier of speculation as well.
If you click on the left side, you'll see financials, and that takes us actually to the financial statements. We can see all their numbers. In this video, focus on the balance sheet. Uh, the first thing you see when you click on the balance sheet is the debt asset ratio. Um, you know, it's just like a person here. When a company has low debt and high assets, you know, that's a, a stable sign. You know, if a company has a lot of debt and not so many assets, there, there's a good chance they'll be financially distressed. That can be a negative. In this particular example, MCH and Mining, we see they, they have no debt and, you know, hundreds of millions in assets. So, uh, so that's a good sign.
The next thing we can see is, uh, current is what's known as a current ratio. Uh, current ratio is basically the current assets, uh, divided by the current liabilities. These are both present on the balance sheet. Uh, the term current is basically, you know, liquid. So what assets can be converted to cash very quickly, and what liability is going to be due soon? For me personally, when I see a company that's small, small and not yet profitable, I really want to make sure that the current ratio is, uh, higher than one, preferably four, five. In this instance, um, you in mining, it's almost 10, which I think is a great sign, uh, for a company that's not yet profitable because one of the challenges, particularly in the mining sector, is for these small companies or, or ones that haven't fully matured yet, is do they have enough capital to sustain operations? Mining can be expensive business. Current ratio is a way of identifying that.
Price to book. So, um, in this instance, we want to scroll down. You'll see total equity. That's the book value of the company. If you take the assets minus the liabilities, what's the, what's the value? So basically, if the company wanted to sell all its assets, all its mining equipment, and, uh, property rights that it may have, that's the value you're getting at. So when you take market capitalization, which is the current market value of buying every share in the company, and you divide it by equity, you get a price to book ratio. That tells us, you know, what's the, how much more of a premium are you paying versus the assets that the company actually has? Personally, these days, I like to see that number, you know, three or less. You know, but again, this is a relative number. So you want to see at what other companies, when you're looking at a whole bunch of companies, this is something to consider and help you identify which companies are underpriced. Lower price to book is a, a good sign, of course.
Be selective. Just say no. Don't invest. Look for reasons to say no. That's about it. Join us more in the next video at InformTrades.com.