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 theres 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 companys fundamentals add up? Also, what does management have to say? And finally, what does the companys stock chart look like?
Essentially, all three questions need to be answered in a positive way to piquemy interest. Thats why when I looked at Centrica (LSE: CNA), I had strong reservations.
Centricas fundamentals as with many companies in the FTSE 100 are sound. However, some investigation into the businesss fundamentals show a utility company with a few war wounds. You see, Centricas been hit on a few different fronts some related to the weather, and others related to economic and social trends. Theres nothing serious just yet, but its certainly worth watching its balance sheet.
Its 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 companys 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.
Im not particularly encouraged by the outlook, either. While many meteorologists have warned that Britains erratic weather is likely to continue for some time, Centrica is hoping it wont. In addition, the company is subject to an enquiry by the CMA. Management says thats likely to place a high burden on the company. Centricas 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). Managements response? We see margins improving and profits growing. Well, Im glad they do! Im 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, Im 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), its 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 its not, but thats not to say Centrica wont 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 businesss 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.