I studied business and finance in one form or another for well over a decade during my teens and 20s — from learning the basics at school, to working out how to value companies in my postgraduate education. During all that time I often thought to myself, “surely there’s a simple way to explain whether or not an asset is worth buying?”. As it turns out, there is. Different money managers will likely have alternate ways of putting it, but here are the central questions I ask to figure it…
I studied business and finance in one form or another for well over a decade during my teens and 20s — from learning the basics at school, to working out how to value companies in my postgraduate education. During all that time I often thought to myself, “surely there’s a simple way to explain whether or not an asset is worth buying?”. As it turns out, there is. Different money managers will likely have alternate ways of putting it, but here are the central questions I ask to figure it out: do the company’s fundamentals add up? Also, what does management have to say? And finally, what does the company’s stock chart look like?
Essentially, all three questions need to be answered in a positive way to pique my interest. That’s why when I looked at Centrica (LSE: CNA), I had strong reservations.
Centrica’s fundamentals — as with many companies in the FTSE 100 — are sound. However, some investigation into the business’s fundamentals show a utility company with a few war wounds. You see, Centrica’s been hit on a few different fronts — some related to the weather, and others related to economic and social trends. There’s nothing serious just yet, but it’s certainly worth watching its balance sheet.
It’s also worth listening to management. I was very keen to see what Chairman Rick Haythornthwaite and CEO Sam Laidlaw had to say following the energy company’s latest results. My journalistic brain is always looking for key words and phrases. Both men were recorded using words like: “difficult day”, “tough set of results” and “work in progress” to sum up the results announcement.
I’m not particularly encouraged by the outlook, either. While many meteorologists have warned that Britain’s erratic weather is likely to continue for some time, Centrica is hoping it won’t. In addition, the company is subject to an enquiry by the CMA. Management says that’s likely to place a “high burden on the company”. Centrica’s also facing concerns from its customers about affordability and the cost of living, lower commodities prices, and energy security (especially with on-going tensions in Ukraine). Management’s response? “We see margins improving and profits growing.” Well, I’m glad they do! I’m not convinced.
The chart of the stock price over the past 12 months is a sad story. The adverse conditions facing the company and the associated disappointing financial results have sent more than a few investors heading for the hills. Now, I’m not a big believer in technical analysis … what I will say, however, is that when the technical story agrees with even part of the fundamental story (including what management are saying), it’s worth taking notice and making a call one way or the other on whether Centrica is worthy of looking after your money.
Making a call
For now, my own analysis tells me it’s not, but that’s not to say Centrica won’t get its house in order in the near term. One thing I really admire about this company is how honest its management is. Indeed, I can tell you that if they start expressing delight in the business’s performance, you can be hopeful that Centrica is once again cooking with gas.
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David Taylor has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.