By Coreen Madanha
You would not expect an Oak to reach the heavens if its roots were rotting beneath the soil. Similarly, you cannot expect an investment to flourish if the company’s “roots”, its financial foundations are weak. Now that we have established our “Zambezi Shield,” we must look deeper into the trees themselves.
Publicly listed companies are legally bound to publish “health reports” known as financial statements. Learning to read these is akin to a farmer learning to read the soil and the sap flow before the planting season begins.
The Balance Sheet serves as the primary root system. It provides a snapshot of strength at a single point in time, listing Assets (what the company owns) against Liabilities (what it owes). A healthy Oak has a root system that outweighs its burdens. For example, a strong company increases its assets while organising its debt to stay at manageable levels. If the roots are deep and the soil is rich with assets, the tree can withstand even the harshest economic droughts.
To illustrate how we calculate these “roots,” let us look at a simple example of a local Cake Company:
| Item | Value (USD) | Category |
| Ovens & Delivery Vans | $50,000 | Assets (What it owns) |
| Cash in Bank | $10,000 | Assets (What it owns) |
| Total Assets | $60,000 | Total “Owns” |
| Bank Loan for Flour | $15,000 | Liabilities (What it owes) |
| Net Wealth (Equity) | $45,000 | Owner’s Stake |
Complementing the roots is the Income Statement, which tracks seasonal growth. It records Revenue (money coming in) and Expenses (money spent on ingredients and labour). What remains is the Net Profit, the actual new wood added to the trunk of your tree. Finally, we monitor the Cash Flow Statement, the “sap” of the tree. A tree might appear green, but if the sap (actual cash) is not flowing, it will eventually wither.
Without healthy cash flow, a company cannot sustain the very dividends that we rely upon for our harvest. Reading these reports allows you to distinguish between a sturdy Oak and a hollow trunk that might fall in a storm. Understanding these roots is the foundation of your knowledge, but even a healthy tree must be bought at a fair price an art of valuation that we will master in our next instalment.
Coreen Madanha is the Managing Director for InvestIQ Oak Wealth (Private) Limited, which is a registered member of the Zimbabwe Stock Exchange (ZSE) and is licensed by the Securities and Exchange Commission of Zimbabwe (SECZ).
