How You Can Decipher A Firm's Annual Report
WHEN Ralph Seger reads a company's annual report, he likes to start at the back of the report and work his way to the front.
That may not sound efficient, but for Mr. Seger, president of Seger-Elvekrog Inc., an investment-management firm in Bloomfield Hills, Mich., it's the best way to bypass unnecessary promotional material.
Not that he doesn't appreciate these time-honored catalogs of corporate performance.
''The reports are very important,'' Seger says. They help show the small investor, as part owner of a company, ''how well his management is performing.''
Seger isn't the only one skipping the front of the book.
Chris Hashley, a data analyst with Morningstar Inc. in Chicago, says comments by the company's president or chairman, found at the front of the report, are often irrelevant and may even be intended to sidestep substantive issues about the company.
Now that you know where to start, what should you look for?
Seger begins with the accountant's notes and any explanatory footnotes. See if accountants raise objections to management's numbers. Even when the numbers pass muster with auditors, damaging information is often tucked away in hard-to-read footnotes.
''Look for a summary of what's happened [to the company] during the past year,'' he adds. ''Why did the company's 'good things' occur? Why did certain 'bad things' happen?'' Look for earnings growth over five or 10 years.
The key to most corporate reports is the balance sheet, which can seem intimidating but paints a financial picture of the company on the last day of its fiscal year. The balance sheet is two-sided. On one side of the ledger are the company's assets. On the other side are its liabilities (both short-term and long-term), and its ''shareholder equity.''
Shareholder equity - found by subtracting liabilities from assets - is the dollar value of the stockholder stake in the company. It should be growing annually. (Shareholder equity is different from the firm's market value, which is based on its share price.)
The income statement, also called the ''statement of profit and loss,'' shows expenses and revenues and will tell how efficient operations are. Find the company's ''operating profit or loss'' - done by subtracting sales costs and operating costs from its net sales. Also, identify the firm's ''return on equity.'' That can be found by dividing the outstanding common-stock equity (or net worth) by net income, after payment of preferred-stock dividends (but before common-stock dividends). Compare these numbers with those of competing firms.
Read those charts
Don't overlook the importance of charts and pictures, says Morningstar's Hashley, who spends his time rating the quality of annual reports of mutual funds (which, like corporations, provide yearly reviews to shareholders). Graphics have been selected to tell specific news or present a certain image about a mutual fund or a corporation, he says.
Some 12,000 to 14,000 publicly held companies in the United States issue annual reports, at a cost of about $5 billion a year, according to a study released last August by Potlatch Corp. The San Francisco firm makes the glossy paper used in many reports. The study found that 45 percent of shareholders read the reports.
By law, an annual report is due out 90 days after the close of a fiscal year for companies that are holding votes at a shareholders' meeting. Publicly traded companies also must file more-detailed reports with the Securities and Exchange Commission (SEC): an overall report, called a 10-K, and three quarterly reports, called 10-Qs. There is ''precious little information'' about the firm that is not disclosed on the 10-K form, says SEC spokesman John Heine.
Increasingly, companies are putting disclosure documents on the Internet computer network or on CD-ROM discs. General information about companies, SEC reports and proposed rule changes, and a daily newsletter are now available on an SEC Internet site (address: http://www.sec.gov).
Logging onto the SEC site, an individual can go to a program called ''Edgar.'' About 80 percent of all corporate disclosure filings are now on the Edgar system. By May 1996, 100 percent will be on the system, Mr. Heine says.
General corporate financial information can also be found on a private Internet site called ''Investors Advantage,'' at http://www.shares.com.