Knowing simple accounting can help you determine a good job!

Many student graduates are probably feeling uncertain about the future, given what is happening now, where the world struggles to deal with major problems like the debt crisis in Europe, low economic growth in the US and how it might affect jobs in Singapore. The economic situation could be possibly better off as to compare with two years ago, however similar doubts among graduates would still linger: "Is this job stable?", "Can this job pay well?", "Is this a good job for me?"

So let’s understand the definition of a good job. In a general sense, a good job is one that offers high deserving salaries, excellent growth, big opportunities and high job securities to the employees. One can argue that a good job might also include the relationship we are able to maintain with our colleagues, the company’s culture and the level of respect we gain in the office. However as we are using financial ratios to better determine a “good” job, no amount of calculation or numbers can determine these qualitative factors. This article therefore attempts to use three simple accounting tests to determine the quantitative factors of a company. The focus is also on how these tests could possibly increase the chances of you securing a successful and rewarding career. Excited? You bet! Here it goes ..=)

The Earning per share test (EPS)
To keep things simple, the Earnings per share’s formula is calculated by taking the net profit of the company and dividing it over the average total number of outstanding shares the company has. Usually, these figures will be calculated for you, which can be simply located under the company’s website information on “financial results” or even the annual reports under “financial overview or financial ratios”. The important thing to note is to look out for a list historical EPS of the company over the last 10 years. The consistency and trend would determine whether or not the company has a long term competitive advantage.

An example: A company with consistent EPS riding on an uptrend will simply look like this
EPS
2001: 0.154
2002: 0.171
2003: 0.170
2004: 0.192
2005: 0.211
2006: 0.230
2007: 0.233
2008: 0.200
2009: 0.245
2010: 0.256 (PASS)

Another example: A company with inconsistent EPS
EPS
2001: 0.314
2002: 0.100
2003: (0.20) loss
2004: 0.120
2005: (0.11) loss
2006: 0.130
2007: 0.100
2008: 0.020
2009: (0.223) loss
2010: 0.130 (FAIL)

Reason:
Having a consistent upward trend EPS for the last 10 years is a very clear sign that the company has a sustainable competitive advantage over other competitors, meaning to say that the company is a powerful one, that is able to sell a product or service that do not need to go through the expensive process of change. The chances of the company making strategic expenditures to increase market share value through advertisement or expansion of its operations are high. This also means that employees under such companies have a higher chance in getting overseas promotions as the company expands its operations around the world to maintain or increase its future EPS. In other words, more job growth is attainable.

Likewise, a company that has a downward inconsistent EPS figures will likely be in a fiercely competitive industry that is highly exposed to the ups and downs of the economy. These companies offer no job stability, in good times they hire fast, in bad times they fire fast as well. This give rise to poorer employment prospects because during bad times such as a recession (cf. economic year 2008 - 2009). Most of these companies have to cut their expenses drastically in order to support their bottom line. And guess what, the easiest expense to cut for such companies is simply operational cost, which is your job!

Companies which have a consistent upward trend EPS are namely Singapore Press Holdings (SPH) and F&N.

The Debt Test
Company Debts, just like any debts, are basically money that belongs to other people and charges interests for lending it to you. These people are known as creditors, banks, trading partners etc. Another indication of a good business to work with, are companies with low levels of long term debts or no debts at all. Simply by looking at the annual report again, under “Company’s Balance Sheet” or “Balance Sheet” under non-current liabilities, you will be able to locate that figure. But don’t just stop there! Locate another figure called the net earnings or net profit under the “Income statement” or “Profit & Loss statement”. Take the Non-current liabilities figure divide by the net profit figure and compare it for the last 3 years.

For example companies with a low debt level will look like this

Non-current liabilities in (2007): $401,000
Net profit in (2007): $107,000 (PASS)
($401,000/$107,000= 3.7times)

Non-current liabilities in (2008): $335,100
Net profit in (2008): $82,000 (PASS)
($335,100/$82,000= 4times)

Non-current liabilities in (2009): $322,100
Net profit in (2009): $109,000 (PASS)
($322,100/$109,000= 2.9times)

The general rule of thumb is to have long term debts not exceeding 5 times the net profit.

Reason:
Companies with low debts history, reflects of a good debt management. Such companies would be a good long term employer to work for simply because they have more cash to pay out good salaries or give more perks (because they pays lower interest) The chances of these companies being able to weather a recession is far better than a company loaded with huge debts.

On the other hand companies with huge debts will likely mean it does not have a durable competitive advantage, which the business is probably in a highly competitive industry where extra capital is constantly needed just to keep their competitive edge.

This also mean to say that if we work for one of these debt-ridden companies, the cost of servicing the debt (paying the interest) will eat up any excess cash and leave little room for salary increment and bonuses; so don’t expect any company dinner and dance or paid vacation for that matter! There will also be little excess capital for growing the business or acquiring new businesses, hence there will be little growth in managerial opportunities. If there is a recession, these companies will also be the first to fire employees in an attempt to cut costs before they go bankrupt. This is simply not an optimal choice for a long term career.

Companies with low debts are SIA Engineering, ABR (Swensons) and Breadtalk

The gross margin test
Finally, to tell whether a company is great one to work for, is to do a gross margin test. Again, just by looking at the “Profit and Loss statement” locate first the gross profit, take that figure and divided it by the total revenue or sales. An example will be:

2007
Gross profit: $127,000
Total Revenue: $355,000
Profit margin: 37.9% (PASS)

2008
Gross profit: $133,000
Total Revenue: $365,000
Profit margin: 36.4% (PASS)

2009
Gross profit: $155,000
Total Revenue: $390,000
Profit margin: 39.7% (PASS)

A rough general guide of a decent profit margin will anything around or above 30%, a low gross profit margin however is one that is around 10-20%. You may need to look at companies that have been around for some time (at least 5 years or more) to do this test properly, this is because young companies may have very high profit margins but these does not mean they have durable competitive advantage.

Reason:
Companies that have excellent long term economics working in their favor tend to consistently have high gross profit margins than those that do not. High gross profit margins give companies the liberty to price the products and services well in excess of their cost of goods sold (COGS). A lower gross profit margin or declining one on the other hand, points to brutal competition as well as lack of pricing power; this could be good for customers but bad for employees and shareholders. Moreover with lower profit margins, it will hamper the company’s ability to raise salaries or give big bonuses, diminishing the company’s capacity to expend capital on new businesses or to survive in a recession.

Companies with good gross profit margins are Vicom & Singapore Exchange (SGX)

So the next time when you looking for a job or rattling through the recruitment section of the newspaper, take some time to download the companies' annual report and do up some simple accounting analysis for yourself!