A recent study has found that women
are twice as likely as men to study
a company’s annual report before
investing in a company. Why don’t
most men bother looking at it before
they jump into a stock? Maybe for
the same reason they hate to stop
and ask for directions.
Don’t just glance at the balance
sheet and say “wow, they’ve sure
got a lot of debt!”. Don’t just
look at the income statement and say
“wow, sales are going up!”.
As investors have found in a big way
this past year, net income can be
easily manipulated. Read the
footnotes. The dirty secrets, by
law, must at least be mentioned in
the footnotes. For instance, a
company can extend the number of
years of depreciation on major
assets (lowering current expenses)
resulting in an increase in
earnings. This sleight of hand would
be revealed in the “summary of
significant accounting policies”.
Also, stock options can be
expensive for shareholders (due to
both dilution of shares and these
shares awarded to employees are from
treasury stock usually bought at
market prices), and not reflected in
earnings. The company must disclose
in a footnote what earnings would
have been, if options had been
factored into the net earnings
calculation.
In the 1990’s, 350 S&P 500
companies increased their bottom
line by a total of $20 billion by
showing pension plan surpluses as
earnings. In fact, such “earnings”
to the tune of $1.3 billion, made up
13% of GE’s year 2000 profit!
Check out the annual report filed
with the SEC, called a 10K. It will
be a bit different then what is
provided to shareholders, and must
conform to general accepted
accounting principles, or GAAP.
This SEC report may also have
additional statements to cover their
backside, like this real one from an
internet company: “we have a
history of losses and expect to
continue to incur significant
losses, and we may never be
profitable.”
Here’s another amazing story
reported with an SEC filing
JDS Uniphase, quarter ending June
2001, reported a huge loss because
they were writing off $44.8
billion in “good will”. This is
more money than what GM, Ford, Sony,
or Boeing are worth, and what did
JDS Uniphase have to say about it?
Quoting CEO Josef Straus “the
company has just been through an
exciting and challenging 12 months”.
It was then explained that these
billions represented companies that
JDS had bought, paying billions of
dollars, which turned out to be
worthless. These “mistakes”
really weren’t mistakes, because
they wouldn’t have been able to buy
the worthless companies in the first
place, if they hadn’t paid more than
they were worth. I’m glad we
have such high-paid, smart people
running these big businesses.
I’m sure that shareholders felt a
whole lot better after hearing this
explanation of why their stock,
which had been trading at $131,
would drop to $2.12.
Other Stock Market Basics Topics:
-
Stock Market Investing – the
Right Way
-
More Stock Marketing Investing
-
How to Pick Winning Stocks
-
The Golden Rule of Investing
-
Avoid Psychological Traps to
Have Successful Investing
-
Changes in Stock Values Can Be
Big Numbers
-
How to Invest Smart
-
Stock Advice - Important Selling
Rules
-
Poor Stock Buying Decisions
-
Market Indicators
-
Stock Market Cycles
-
When a bear stock market may not
be a bear market
-
Stock Index Futures
-
Four Things that Affect Stock
Valuation
-
What is a P/E ratio?
-
Value Investing
-
Cheap Stocks
-
What is a Financial Statement?
-
Analyzing Financial Statements
-
Stock Market Tip - Red Flags to
Look For When Investing?
-
The Annual Report – How to Read
-
Stock Market Analysts – Stock
Market Advice and Tips
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